Tax Cuts and Conservative Smokescreens

Fiscally speaking, conservatives are masters of the smokescreen. Rather than confront basic questions of fairness in matters of taxes and spending, they reframe issues to sidestep such questions, giving them more leeway to push for policies that would disproportionately benefit the wealthiest among us.

For decades, conservatives have forcefully pushed for lower tax rates on capital gains, noting that more and more Americans own stocks directly or through mutual funds and, thus, millions will benefit when they realize gains on their investments. What conservatives hide is that the vast majority of gains go to those at the very top, so lower capital gains rates provide a huge bonanza to the very rich and much less to everyone else.

More recently, conservatives have argued for a lower estate tax by reframing it as the “death tax,” creating the image of a tax that affects all Americans as they pass from life and assume their final resting place. What they hide is that, as the estate tax rate has fallen and the value of an estate that‟s exempt from the tax has risen in recent years, the vast majority of estates do not face the tax.

Now, we see the same hide-the-ball tactic in the conservatives‟ quest to extend President Bush‟s tax cut for the wealthiest Americans, which is due to expire at the end of this year. Rather than address the fairness issue head-on, conservatives shift the focus of debate by asserting that letting the tax cut expire will prove a huge burden to small businesses.

Just this morning, House Minority Whip Eric Cantor wrote in a Wall Street Journal op-ed, “President Obama‟s impending tax increase is not just a hike on a few „millionaires and billionaires,‟ as the White House tries to frame it. Roughly half of all small business income in America will face a higher rate, making this tax increase a direct assault on job creation and innovation.”

Sounds ominous, doesn‟t it? Well, it would be if the issue was as straightforward as Cantor suggests – if, in essence, the tax would affect the mom-and-pop store, the luncheonette, and other such local establishments that people think of when they hear the term “small business.” Take a closer look at the issue, however, and you see the conservatives‟ intellectual sleight-of-hand in full force.

Consider, for instance, a few facts that emerge from the New York Times‟ even-handed treatment of the issue over the weekend:

  • 97 percent of small businesses won‟t face this higher rate, which applies to income that exceeds $200,000 for individuals and $250,000 for couples, simply because they don‟t make enough money.
  • Of the 750,000 businesses that would face the tax, many are “sole proprietors,” which means they include, as the Times put it, “everyone from corporate executives who earn income on rental property to entertainers, hedge fund managers and investment bankers.” And because 80 percent of businesses are sole proprietorships, “90 percent of the tax cut would be derived from businesses without employees.”
  • The Internal Revenue Service “classifies small businesses … vastly different from the public perception of the neighborhood dry cleaner or the small tool-and-die shop,” so that, according to the congressional Joint Tax Committee, “many of the tax returns categorized as small businesses were actually filed by wealthy taxpayers who earned business income through limited partnerships or S corporations to allow their firms to avoid paying corporate taxes.” Consequently, “in 2005, 19,000 of those small businesses had revenue of more than $50 million.
  • As for Cantor‟s assertion that “this tax increase [is] a direct assault on job creation and innovation,” the Times counters that “much of the research over the last two decades has found that increases in top tax rates can lead to an increase in the formation of small businesses, as wealthy individuals apparently begin start-ups to avail themselves of the more generous tax breaks offered to businesses.”

So, when you hear that letting the Bush tax cuts expire for those at the top will hurt “small business,” don‟t weep for the grocer down the block. That‟s surely not what this tax debate is all about.

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