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Public Statements

Small Business Tax Hikes

Floor Speech

Location: Washington, DC

Mr. HATCH. Mr. President, one thing people admire about firefighters is that when others are running away from a burning building, they run toward it. Conversely, while most people prudently avoid cliffs, President Obama and the congressional Democratic leadership are racing to go over the fiscal cliff ``Thelma and Louise'' style.

Absent action by Congress and leadership by the President, at the end of the year almost every Federal income tax payer in America will see an increase in their rates. Some will see a rate increase of 9 percent, while others will see a rate increase of 87 percent.

Although not often discussed--and although the President likes to avoid discussing it--the impact of these rate hikes will have a uniquely damaging impact on small businesses and the jobs they provide. Small businesses are the engine of job creation in our economy, and the rate hikes the President insists on will hit them hard, undermining economic growth and hampering innovation and job creation. Whether we go over the fiscal cliff or whether the President gets his way on raising rates, taxes will go up significantly on small businesses.

The President would like us to think that raising these taxes is no big deal; it will just hit people who already have a lot of money and who can ``afford to give a little more.'' As President Obama put it in using his own finances as an example, absent tax increases, ``I'm able to keep hundreds of thousands of dollars in additional income that I don't need ..... ''

With due respect, this is an amazingly naive understanding of tax rates and their impact on economic growth. It assumes that all the people hit by these higher tax rates are wealthy wage earners, CEOs, and financiers. It completely negates the impact on small business income that will be subject to these individual rate hikes.

Here we are at Christmastime and the Democrats want Santa to put coal in the socks of all the small businesspeople. Even President Obama acknowledges that two-thirds of the new jobs in our economy are created by small businesses. The vast majority of small businesses are organized as what we call flowthrough business entities, such as partnerships, S corporations, limited liability companies, and sole proprietorships. In other words, these small businesses pay the individual income tax rates.

Because the vast majority of small businesses are flowthrough business entities, the income from these businesses flows through the business directly onto the small business owners' individual tax returns. Therefore, any increase in individuals' tax rates means those small businesses get hit with a tax increase. This tax increase lands on those small business owners even if they do not take one penny out of their business's profits and they put it all back in to be able to hire more people or to get more inventory or whatever that helps their business along. Even if a small business reinvests all its income to hire more workers, pay the workers they already have, or purchase equipment, they will still get hit with this looming tax hike.

The President and those in his party who support these rate hikes owe it to the American people to explain why their proposal will not adversely impact small businesses and those who depend on them for their livelihoods because the data suggests the impact will be severe. There is no question about that. Why can't we get the real facts here?

First, according to the Congressional Budget Office, 80 percent of the revenue loss from extending the 2001 and 2003 tax relief provisions is found among those making less than $200,000 per year if single and $250,000 if married--the President's threshold.

Second, the nonpartisan official scorekeeper for Congress on tax issues, the Joint Committee on Taxation, tells us that 53 percent of all flowthrough business income would be subject to the President's proposed tax hikes. This is our Joint Committee on Taxation, which is a nonpartisan committee: 53 percent of all flowthrough business income is subject to tax hikes on the top two rates.

Given the agreed-upon importance of small businesses to our economic recovery, it is a mystery to me why the President and his Democratic allies would pursue tax increases on these job creators. We simply cannot afford to raise taxes on over half of all this small business income.

President Obama and congressional Democrats defend their plan by claiming that only 3 percent of small businesses would get hit with this tax increase, so we should not fear raising taxes on them. However, they are misreading the Joint Committee on Taxation's letter on this issue. That letter only talks about the percentage of taxpayers affected, not the percentage of businesses affected.

For instance, if 10 people own one business, President Obama and congressional Democrats count that one business as 10 businesses when they make their statement about a small percentage of businesses affected. Obviously, that is not the right way to look at this. The truth is, they don't know what percentage of businesses they are proposing to raise taxes on and, what is worse, they don't seem to care.

The IRS publishes its Statistics of Income Data on its Web site providing the most recent available tax data, which is currently tax year 2010. According to that official IRS data, when looking at the entire United States, 21 percent of owners of S corporations and partnerships, including limited liability companies, make $200,000 or more.

Since President Obama's proposed rate hikes occur on singles making $200,000 or more and married couples making $250,000 or more, the vast majority of this 21 percent would get hit with a tax increase. The only portion of this 21 percent of S corporation and partnership owners who would not be hit with a tax hike are those who are married and make between $200,000 and $250,000.

According to a 2011 Ernst & Young study entitled ``The Flow-Through Business Sector and Tax Reform,'' citing 2007 data from the U.S. Census Bureau, over 44 million workers employed by S corporations and partnerships, including limited liability companies--over 60 percent of the 69 million employees who work for flowthrough businesses--are going to get hurt. So almost 21 percent of S corporations and partnership owners will be subject to the tax hikes on the top two rates, and over 64 percent of the workers in flowthrough businesses are found in these types of businesses. This is before we even consider the impact on owners of sole proprietorships, which employ the remaining 36 percent of employees in the flowthrough sector.

When the Federal Government takes an additional 5 percent of the money that these small businesses earn, the effects are clear. Far from this being--as the President suggests--money business owners don't need, it will, in fact, lead to lost jobs, stagnant or reduced wages, and a decrease in investment.

The President campaigned on raising the top rates, and he seems bent on doing so. But he owes it to the American families to come clean about the impact these hikes will have on the economy and on jobs. He should come clean and admit his desire for redistribution trumps all other considerations.

The debate over the fiscal cliff has been quite discouraging for me. The President knows why it is that Republicans support full extension of current tax policy, and it is not because we are trying to defend the so-called rich. It is because we have a genuine and empirically grounded concern about the impact of marginal rate hikes on small businesses, the jobs they create, and the men, women, and families who depend on them. I couldn't care less about the truly rich.

Instead of acknowledging that marginal rate hikes would have an outsized impact on small businesses, the President has decided instead to demagog this issue, paint Republicans as out of touch, and put political points ahead of jobs. It is well past time for a grownup conversation about tax policy. Our door remains open, and we look forward to having the President walk through it.

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