The architects of Clintonomics have done their best to convince the American people that their plans are intended to help, not harm, small business and job creation. Unfortunately the bulk of the $250 billion in tax hikes President Clinton signed into law on August 10 as part of the Omnibus Budget Reconciliation Act of 1993 (OBRA93) will trounce small-business owners and their workers. President and Mrs. Clinton's health-care reform proposal would further increase the financial burden on many fragile small businesses by mandating health coverage for all employees. Instead of encouraging small-business growth and more employment, these higher taxes and spending mandates will only transfer small-business resources to a growing government at the expense of expansion, new hiring, and increasing wages.
The largest revenue raisers in OBRA93 are the retroactive income-tax hikes that kicked in on January 1, 1993. Although these taxes were touted as hitting only the "rich," hundreds of thousands of small businesses will absorb the burden. That's because most small businesses pay individual income taxes and are organized as Subchapter S corporations, partnerships, or sole proprietorships. Of all the businesses in America, 80 percent are unincorporated and pay taxes as individuals. These businesses are hit hardest by Clinton's income-tax hikes and will lose the most jobs as well.
The "soak the rich" tax hikes in the budget will have many small businesses facing as much as a 14.5 percentage point increase in their marginal income-tax rate--a whopping 46 percent (see table 1).
The Clinton administration justified and sold this major tax hike largely by claiming that only a limited number of small businesses would have to pay. However, an examination of 1991 tax returns paints a different picture of what's in store. At least two-thirds of taxpayers with adjusted gross income over $200,000 (those assumed to have incomes high enough to be affected by Clinton's income-tax hikes) reported business income on their individual income tax returns (see table 2).
The bulk of small-business income would be subject to the new income-tax hikes. Looking at partnerships and Subchapter S corporations reveals that at least 60 percent of the income generated by this group of small businesses will face higher taxes. Any tax increase on this pool of income is precisely what reduces the ability of these successful small businesses to reinvest and expand, to increase wages and benefits, or to hire new workers. It is the amount of after-tax income available to expand--not simply the number of businesses paying higher taxes--that is critical to job growth.
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