U.S. business will not be able to compete with European, Japanese and other world economies with the Obama 2011 tax increase

I've told you guys over and over that business is not competitive in the U.S. because they are taxed at or above most outher countries.

Well it's now a fact that other countries dropped their tax rates by the same amount as the Bush tax cuts amounted to, in order to compete with us.

If we raise taxes now on business, as this increase will do in 2011, we will no longer be competitive, at a time when we most need to be.
Unless congress acts to stop the tax increases, it will further erode jobs and hurt the economy.

--------------

We've heard this line over and over again about how Obama merely wants to let the tax rates for the evil rich "return to the levels" they once were before the Bush tax cuts. Democrats will never, ever admit that this is a tax increase. But Chris Edwards of the Cato Institute puts these tax hikes into a perspective that I hadn't heard before. On a global scale, those tax level may have been "acceptable" in 2000, but the world has changed and so have tax rates world-wide. So would these tax rates even be competitive in today's society?

• President Bush cut the top federal tax rate by 5 percentage points, but the average top rate in the 30 OECD nations has also fallen by 5 percentage points since 2000.
• Unless policymakers extend current tax relief, the combined U.S. federal-state top rate will increase from 41.9% to about 46.5%, based on OECD data. That will give us about the tenth highest rate among the 30 OECD nations.
• If you click on this link, the chart shows that the average top OECD rate fell from 46.7% in 2000 to 41.5% in 2009. If we let the Bush tax cuts expire, we won't be simply going back to our situation in 2000--the world has changed since then as other countries have adopted more competitive tax rates.

It's amazing how Obama and the Democrats preach "change" and harp on the fact that Republicans "will continue the policies of the Bush administration" .. yet their own plans, when it comes to the evil rich, is to allow Bush-era tax rates to prevail? Why are they OK with this reversion back to Bush, but not to others?

Before taking action on this issue, policymakers should consider the following facts and data. (All information is cited in my related congressional testimony).

• President Bush cut the top federal tax rate by 5 percentage points, but the average top rate in the 30 OECD nations has also fallen by 5 percentage points since 2000.
• Unless policymakers extend current tax relief, the combined U.S. federal-state top rate will increase from 41.9% to about 46.5%, based on OECD data. That will give us about the tenth highest rate among the 30 OECD nations.
• The chart shows that the average top OECD rate fell from 46.7% in 2000 to 41.5% in 2009. If we let the Bush tax cuts expire, we won't be simply going back to our situation in 2000—the world has changed since then as other countries have adopted more competitive tax rates.

• President Obama's proposed top federal rate of 39.6 percent is 41-percent higher than the 28-percent top income rate achieved in the late 1980s after the bipartisan Tax Reform Act of 1986.
• Higher marginal tax rates will reduce incentives for working, investing, and expanding businesses, and they will increase incentives for tax avoidance and evasion.
• If income tax rates rise, some high-income workers will work fewer hours and retire earlier. Some spouses in two-earner families will stay out of the workforce. Some angel investors will have less cash to invest in start-up ventures. And some small businesses will decide not to buy new equipment or hire new workers.
• Higher-income taxpayers often have a lot of flexibility on their working and investing decisions—tax them more and they will reduce their reported income alot. Robert Carroll finds that this effect of raising the top rate from 35% to 40% would offset about 40 percent of the government's otherwise expected revenue gain.
• Today's highest-earners are generally not passive inheritors of wealth, but are usually self-made and entrepreneurial. Glenn Hubbard notes, "when you look at data, you see that people who are rich almost entirely are rich because of entrepreneurial risk taking."
• Many people with high incomes are angel investors, who help to fuel small business expansion. If their taxes go up, they will have less money and fewer incentives to invest, and they will park more of their money in tax-free municipal bonds.
• More than half of all business income in the United States is reported on individual returns, not corporate returns. This income is reported by proprietorships, partnerships, LLCs, and S corporations. If the top two individual income tax rates are increased, it would hit a substantial amount of this business income.
• Robert Carroll looked at individual tax filers who derived more than half of their income from a business. He found that one-quarter of these taxpayers were in the top two tax rate brackets, and thus would be hit by the proposed tax increases.
• The Joint Committee on Taxation found that about 25 million individual tax returns will report about $1 trillion of net positive business income in 2011. Of that total, 44 percent is in the top two income tax brackets and thus would be hit by the proposed tax increase.
• In an empirical study, Glenn Hubbard and William Gentry found that higher marginal tax rates discourage entry into self-employment and business ownership. A study by Donald Bruce and Tami Gurley for the SBA similarly found that marginal tax rates affect entrepreneurship.
• Once a small business is up and running, empirical research by Robert Carroll, Douglas Holtz-Eakin, Mark Rider, and Harvey Rosen found that higher individual income tax rates negatively affect hiring, investment, and expansion.
   

Those are the facts, and here are my views. It's very sad that a nation that has been a bastion of free market growth and individual achievement has a tax code that is becoming very hostile to high-earners, entrepreneurs, and businesses.

Let's keep the Bush tax cuts, cut our corporate tax rate from 40% to 20%, and cut government spending. Rather than the government filling its coffers at the expense of families, that policy would make the economy boom, and fill government coffers as a side effect of rising family incomes.

Chris Edwards • September 14, 2010 @ 3:05 pm