Chapter 10: The Myth of Job Creation

JOB CREATION AND PUBLIC INVESTMENTS

Making a myth that uniquely caters to the interests of the very best-off (roughly the top 1% in income and wealth), while at the same time appealing to many who live in despair because of having no job or living in fear of losing their job, challenges the imagination of myth-makers. But, the myth-makers have proven up to the challenge. The proposition that the very best-off cannot pay more taxes without slowing economic growth and costing the loss of jobs is an article of faith cherished by many tax-cutters, the leading missionary of which is the former Speaker of the House Paul Ryan who previously served as the Chairman of the House Budget Committee. As a rationale for this belief, the tax-cutters argue that many small business owners (whose businesses are organized as S corps and whose business profits are taxed at personal income tax rates) are robbed of their incentive to create more jobs because they pay taxes at a rate up to 37%. This rationale, however, ignores the facts that (1) owners of small businesses make up only a small portion of those who pay personal income taxes at a 37% rate, and (2) there is no clear evidence that a 37% rate costs jobs.

As with all myths, this myth contains a grain of truth, but a deceptively tiny grain of truth: anyone can be taxed at a level where they will not work for the next dollar, but taxing to pay for public investments to enable businesses and workers to compete globally does not require taxing at anywhere near that level. Like a business owner who takes money out of the business for a vacation instead of upgrading the business’s computer system endangers the business’s ability to compete, cutting taxes on the very best-off (so that they can upgrade their art collections instead of making needed public investments) endangers the economy’s competitiveness. The “you cannot increase taxes on job creators without losing jobs” myth has been contrived to appeal both to those among the rich who do not want to pay higher taxes and to those who are so desperate to get or keep a job that they will grasp at straws. This is an especially cruel myth because the very best-off need no help and the jobless and those in fear of losing their job need real help, not an empty promise.

For jobs to be created, businesses and workers must compete successfully in global markets, and for them to do so, public investments must be made. Enabling businesses to compete successfully means making public investments that will (1) provide a superior transportation and communications infrastructure; (2) develop the most highly educated workforce; (3) keep labor costs low by removing, as business expenses, the cost of paying for employees’ retirement, health care, and post-secondary education; (4) assure free access to international markets; (5) guarantee national security against foreign military threats; and (6) maintain open and free capital and labor markets. Enabling workers to compete successfully means providing them with (1) the financial assistance necessary to get the post-secondary education they need to realize their full potential and (2) a decent social safety net that includes (a) retirement income, (b) the availability of health care, and (c) unemployment compensation during economic downturns. Paying for these public investments will cost money that can only be paid for by increasing taxes above current levels on the very best-off.

Exploiting the Myth

Paul Ryan’s “Roadmap to America’s Future,” the House Budget Plan of 2008 (as since updated by the House’s 2010 and 2012 budget plans) exploits the “you cannot tax the job creators without costing jobs” myth by proposing tax cuts for the very best-off to be paid for by severe cuts in public investments. The most notable change from Ryan’s original budget in 2008 to his budget in 2012 was to rebrand it as the “Path to Prosperity.” This approach to taxation stemmed from the premise that in the money-making game, the winners should keep more of their take coupled with its corollary that losers are siphoning off too much of it. This premise is based on Ayn Rand’s economic philosophy that it is the winners who advance society and taking from them to give to the losers only penalizes success and rewards failure. Losers, in Rand’s world, are there to be used by winners and not coddled. As a devotee of Rand’s economic philosophy, former Speaker Ryan’s policies attempted to advance this philosophy to the furthest political extent possible.

The Path to Prosperity would have implemented the philosophy that the winners should get to keep more of their take and the losers should not get coddled through two complimentary policies, first, total taxes would be capped at 19% of GDP with the top personal income tax rate being no higher than 25% and, second, total spending would be capped at no more than 20% of GDP. Individually and together, the implementation of these policies would transfer significant income and wealth to those at the very top over time at the expense of everyone else.

Capping the tax rate for the very best-off at 25% would reduce, as compared with then existing tax policies, their share of the tax burden. With the generational trend of income concentrating at the top, the very best-off’s share of the tax burden would have been reduced further. A 25% rate cap would have further concentrated after-tax income at the very top resulting in shrinking very best-off’s share of the tax burden at everyone else’s expense. With the passage of time and the continued concentration of income at the top, the disparities in after-tax income between those at the top and those in the middle would reach levels not known for a century.

Capping spending at 20% of GDP over time would reduce well below the current levels of revenue available to pay for public investments, and without adequate public investments, America’s businesses and workers will be unable to compete successfully in worldwide markets. In 2014, total spending amounted to 20.5% (just over the Path to Prosperity’s 20% cap) with Social Security, Medicare and other health care programs accounting for 9.8% of GDP. As a result of the aging of the population and without the addition of any new benefits, CBO estimated (in its 2014 April Long-Term Budget Outlook and as updated in July and August) that these programs will have accounted for 11.5% of GDP in 2024, and 14.3% in 2039. So, if spending were to be held to then-current levels (except for growth in Social Security, Medicare and other health care programs), total spending in 2039 would have hit 25% of GDP, or five percentage points above the 20% cap.

Squeezing Everyone but the Very Best-Off

To hold spending to a 20% cap in 2039 would have meant either cutting those particular programs by about 46% or cutting all government spending across the board by about 20%. Since it is unlikely that the elderly would accept a 46% cut in their benefits, it is likely that other funding for public investments, like loans and grants for post-secondary education, transportation facilities, such as roads, bridges, and ports, national defense and intelligence-gathering, law enforcement, unemployment compensation during economic downturns, and so forth, would have had to be cut well below 20% from then-current levels. As those programs were being cut, the after-tax income of the very best-off would have been growing relative to everyone else, and the very best-off’s share of the tax burden would have shrunk relative to everyone else.

Taken as a whole, cutting taxes, which overwhelmingly benefits the very best-off, and cutting spending for public investments, which primarily benefits businesses and the less well-off, would have resulted in a massive transfer of income and wealth to the very best-off. Limiting total spending to 20% of GDP so that tax rates could be capped at 25% for the very best-off would have gone a long way toward realizing Ayn Rand’s dream of America being a land ruled by fortune in which the winners could win without limit, losers could lose almost everything, and safety nets would be cut to shreds.

Timing is Everything and Now is Not the Time for the Roadmap

Tax policy either makes sense or does not in the context of the times, and the times would have been terrible for implementing the Path to Prosperity. In this, the second decade of the 21^st century, all American workers, apart from the very best-off, have endured over 30-plus years of static or falling incomes while the very best-off have enjoyed exploding incomes. Static and falling incomes leave workers little (if any) money to save for their retirement and the post-secondary education of their children, much less saving for an emergency. For those who doubt the inability of most Americans to save, check out the Middletons’ family budget, and identify where it can carve out enough cash to save for their own retirement and the post-secondary education of their children. To make things worse for all but the very best-off, the cost of post-secondary education has increased about six times faster than inflation and the cost of health care has increased about three times faster than inflation over the last 30-plus years.

If incomes were not concentrating at the top, if the pool of investment capital were shrinking, if over-consumption threatened inflation, if the costs of health care and college were growing no faster than inflation, if middle-income workers had room in their budgets to save for their own retirement and the post-secondary education of their children, then the Path to Prosperity’s prescription of cutting taxes for the very best-off might make some sense. But, since none of these things were happening, the Path to Prosperity’s tax-cutting prescription for the very best-off and cuts in public investments made no sense. There is a time and place for everything, but the time was not right, and America was not the place, to implement the Path to Prosperity’s tax-cutting policy. Thankfully, the Path to Prosperity was never implemented, but it still remains the dream of many who want lower taxes for the best-off.

BUSINESS MUST HAVE AN ENABLING ENVIRONMENT

Businesses (large and small) are the source of all wealth and employment in America, and as such, businesses must be nurtured with an enabling environment and not over burdened with taxes. By necessity, business and government are married to each other, and like all marriages, its success or failure depends on the respect that each participant has for the needs of the other. In their marriage, it is the responsibility of business to provide jobs for workers, goods and services to consumers, and profits to reward investors, and to pay taxes; and it is the responsibility of government to provide an environment that enables business to make the best of its opportunities. Getting the money to provide an enabling environment means taxing. But in providing an enabling environment, an age-old challenge confronts government: it must tax enough to do what it should do, but it should not tax so much that it stifles enterprise.

For businesses to succeed, the government must provide an environment that includes, among others, the following components:

• Free and open access to both domestic and foreign markets for all businesses: For businesses to have free and open access to domestic markets, there must be a rule of law which includes law enforcement to provide security for persons and property, regulation to protect health and safety and prevent and punish fraud, improper restraint of trade, and anti-competitive practices, and a court system to enforce contracts. For American business to have free and open access to international markets, there must be a national security and military establishment that assures border security and open sea and air lanes and international trade agreements that assure American business access to foreign markets.
• A skilled workforce suitable to the needs of business: For business to have skilled workers, there must be an education infrastructure (both K-12 and post-secondary, including universities and technical and trade schools) that assures that all willing and able workers (regardless of their financial resources) are educated in marketable skills to the fullest extent of their ability.
• Transportation facilities that assure the free flow of goods and services in commerce: For business to have a free flow of goods and services in commerce, there must be transportation infrastructure that provides road, rail, port facilities, and air transport that connects all significant markets.
• Communications facilities that assure the free flow of information in commerce: For businesses to have access to commercial information, there must be an information infrastructure that enables information (in all forms) to be transmitted electronically over the airwaves—by land, sea, and air.
• Government fiscal policy that promotes a growing economy and cheap capital for business: For businesses to grow, the government must pursue fiscal policies that contain inflation and encourage low interest rates, stimulate demand or investment when either is abnormally low due to adverse economic conditions, and keep the national debt within financially responsible limits.
• A social safety net that relieves businesses of providing health care and retirement benefits to workers from wages: For American businesses to be competitive in the global marketplace where health care and retirement benefits are provided by governments or not provided at all, social insurance programs must be funded by taxes instead of higher wages in order to maintain the competitiveness of American business.
• Social welfare programs that promote social and political stability: For American businesses to prosper and capital markets to function efficiently, government must pursue social welfare policies that promote social and political stability.

The cost of an enabling environment is overhead like rent, labor, and utilities, and as such, this cost appears on a business’s income statement under the category “taxes.” Taxes, then, are just another cost of doing business. For the marriage of government and business to be fruitful, government must advance policies that create and maintain an enabling environment, and business must be willing to support the level of taxes necessary to implement these policies.

While all businesses are not equally dependent on each component of an enabling environment, all businesses are dependent to a greater or lesser extent on the success of other businesses. No business can succeed if other businesses with which it does business (such as its customers, contractors, sub-contractors, vendors, suppliers, and financiers) suffer or fail.

All businesses, therefore, have a mutual interest in maintaining an enabling environment for all–for any business to succeed, so too must many other businesses.

The Risk of Failing to Address Business’ Need

Imagine an otherwise successful business mired in a disenabling environment confronted with any one or more of the following problems over which they had no part in creating and no ability to control:

• A business loses a contract because it cannot find enough skilled workers to fulfill a contract due to a broken system of education, K-12 through college.
• A business loses profitability because of an unanticipated explosion of energy cost due to a Middle East oil crisis.
• A business loses a contract because it cannot get its goods to market as a result of a major bridge on a heavily travelled interstate highway crumbling due to inadequate maintenance.
• A business fails because it cannot refinance its outstanding debt because of an unanticipated spike in interest rates due to market concerns of an out of control national debt.
• A business fails because of an oil spill (which occurred as a result of lax regulation) that causes a reduction in tourism due to environmental damage.
• A business fails because a competitor engages in illegal anticompetitive practices due to the failure of officials to enforce regulations.
• A business fails because of flood damage caused by the lack of maintenance of a system of public dikes and levees.
• A business fails because of an urban riot in a major metropolitan area as a result of pent up frustration from a growing underclass of unskilled workers.
• A business loses a contract to foreign competitors whose wage structures do not include health care and retirement benefits because the competitors either have these benefits provided by their governments or their workers do not demand these benefits.

Each of these examples (and a million more) illustrates how an individual component of a disenabling environment can cause millions of businesses to lose an opportunity or fail. Each time an individual component is under-funded, and a group of businesses suffers as a result, the businesses with whom these businesses do business also suffer. A chain is no stronger than its weakest link.

The Needs of Workers and Their Families

Identifying and addressing the needs of individual workers and their families challenges the imagination far more than that for businesses. While an enabling environment for businesses is one that increases their profits and growth, no settled consensus exists for what constitutes an enabling environment for the well-being of workers. Profits and growth in business can be quantified, but what constitutes the well-being of individuals has eluded history’s most profound thinkers.

Imperfect though it may be, most 21^st century Americans would probably agree that well-being for individual workers is a world in which the exceptional are left free to soar as high as their talent and drive will take them and the non-exceptional who can work have jobs with at least a living wage, education for their children that will enable them to realize their potential, decent health care if they become ill, and a decent retirement income after a lifetime of work. Assuming that this is what Americans want, then economic realities will force the government to create an environment to enable individual workers to realize these aspirations.

Over at least the last 30-plus years, wealth and income have concentrated at the top, and there is every reason to believe that this trend will continue. For the exceptional, the environment for advancement has never been more inviting, but for the non-exceptional, the environment for maintaining, much less increasing, prosperity has turned mean. A growing number of Americans, including many with incomes above the median, live with the reality that their income is insufficient for them to maintain a decent standard of living, pay for their own health care, pay for post-secondary education for their children, pay for their own retirement, and pay income taxes. Shortage, not surplus, rules the monthly budgets of most individuals with median incomes and below.

For any who doubt this, take another look at the Middletons’ monthly budget and suggest how they could squeeze enough out of their budget to save for the post-secondary education of their children and their own retirement. With things as tough as they are for median income families like the Middletons, imagine the anxieties that trouble those millions of Americans with median and below incomes who are being drawn closer and closer to poverty.

The Necessity of an Enabling Environment

Global capital, including much of American capital, can realize its highest return by hiring the most skilled, efficient, and cheapest labor in the global market. In this world, American workers will not be hired, even by American capital, unless they compete successfully with foreign labor in terms of skill, efficiency, and cost. A rising standard of living for American workers, then, depends on their becoming the most attractive workforce in the world to global capital.

Not only does the fate of American workers and their families depend on their winning the labor competition against foreign competitors, but the fate of that part of American business that serves primarily the domestic market also depends on the success of American workers. The greater the success of American workers, the more money they will earn and the more money there will be to consume the goods and services produced by American business. To the extent that American workers lose to foreign competition, many American businesses will share in the loss. Unless America’s workers have an environment that enables them to compete in global labor markets, America’s economic strength and social coherence will suffer.

For exceptional individuals (who have the resources to get all the education they need to realize their aspirations), the government need only get out of their way and not tax them so much that it dampens their desire to scramble for their next conquest in business. For non-exceptional individuals (the vast majority of American workers) to realize their aspirations, the government must provide an environment that includes, among others, the following components:

• Expanded government subsidies for K-12 public education and loans and grants for post-secondary education for all workers: For America to have a growing workforce that can compete successfully in global markets, all workers must have access to high quality K-12 public education and all the post-secondary education needed for them to become economically productive and competitive with foreign workers.
• Expanded government subsidies for retirement and health care programs for all workers and their families: The wages of many foreign competitors are not burdened by social insurance programs because either the governments pay for these benefits through taxation or the foreign workers receive no health care or retirement benefits. Paying for these benefits from wages makes American businesses less competitive and encourages American businesses to outsource jobs to countries where they can find labor that does not expect these benefits.
• Relief from taxation and/or government wage subsidies for those whose standard of living falls below a reasonable standard: Global competition will not permit many workers to be paid anything above a bare living wage. For many working Americans to have a reasonable standard of living, their tax burden must be lessened, and/or their retirement, health care, and the post-secondary education of their children must be supplemented by increased government subsidies.

The programs necessary to create an enabling environment for workers and their families should be designed not as entitlements for the individuals to be helped but as investments to build the world’s most competitive workforce. Entitlements indemnify recipients for misfortune while investments are made in the expectation of a return. Life is unfair and government subsidies cannot redress the unfairness. Fate has made some smarter, more industrious, richer, more attractive, and luckier than others, and government subsidies cannot undo fate’s handiwork. But, government subsidies can help those who have ability and drive (but who lack means) be all they can be and strengthen America.

The purpose of the programs that provide an enabling environment for workers is not to make the beneficiaries comfortable but to make them and their children productive. Taxpayers, like investors, have a right to expect a return. An enabling environment for American workers would provide them with a reasonable standard of living without burdening business with wages higher than the market will bear.

The Risks of Failing to Address Workers’ Needs

Social equity promotes political stability, and political stability promotes the free and efficient flow of markets and economic growth. Nothing will erode America’s economic advantage in the global economy more than domestic political instability. A perception of a lack of social equity among a significant number of America’s workers over time can lead to political instability.

For America, political stability is an intangible asset much like goodwill is in the business world. The fact that an asset is abstract and difficult to quantify does not mean that it is not real and does not have value. Just as costs spent to enhance a business’s reputation are capitalized and carried as an asset on its balance sheet, so too should costs spent to enhance America’s political stability be capitalized and carried on its balance sheet.

Without both a competitive workforce and the political stability that stems from it, America’s economy will decline. The public investments required to provide an enabling environment for individual workers and their families will be costly to taxpayers, but the cost of failing to make these investments will weaken America, and a weakened America will afflict the rich as well as the poor.

TAX REVENUES AS AN INSTRUMENT OF NATIONAL POWER

America’s tax base empowers it to equip both its businesses and individual workers with all the resources needed to prevail in global economic competition. America’s ability to increase its tax revenues to meet national needs should be regarded as an instrument of national power which is more potent than its military prowess. As Table X-1 shows, America’s tax base, as measured by GDP, and low taxes, as measured by taxes as a percentage of GDP, establish that the country has the resources necessary to provide its businesses and workers with more resources than any other major economy in the world.

Taxing to Invest Rather than to Consume

While America can raise taxes to make the public investments that will enable its businesses and workers to win a worldwide economic competition, it must be willing to do so. Willingness, however, depends on Americans choosing to tax and invest in public investments (not just private investments in business) rather than consume. Investment (public and private) means that money spent on goods or services will yield a return over a period longer than a cycle while consumption means that money spent on goods and services will have no lasting effect beyond a cycle. In most instances, a cycle is a year.

To subsist, individuals and organizations (including both businesses and governments) must consume a certain amount of goods and services. Once these individuals and organizations have spent enough money to subsist, they must then choose whether to spend any remaining money on more consumption or more investment. Subsistence for today’s Americans means a livable quantum of shelter and food, transportation for employment, enough health care to keep alive, and minimal education for their children. Those who live in poverty live at a subsistence level. Above poverty, the American standard of living ranges from barely adequate for the lower middle class, to adequate for the middle class, to plush for the upper middle class, and to luxurious for the wealthy.

Economists refer to the portion of income above what is needed to subsist as discretionary income. For those Americans who have discretionary income, they are burdened with daily decisions about whether to consume more or save and invest, and as their discretionary income grows, so too does the burden of their decision. Discretion means choice, choosing means thinking; and for many, thinking is a burden. Poverty stricken Americans, however, are largely freed of choice, and, as such, are burdened only by the daily challenge of survival.

For the most part, the American way of life has been for Americans to ratchet up their consumption from the barely adequate, to the adequate, from the adequate to the plush, from the plush to the luxurious, and from the luxurious to the ostentatious, and, in many instances, ahead of their income. The choice to consume above subsistence or invest pits the present against the future. Consumption leads to current bliss while investment leads to future wealth. History offers no more telling example of the consequences of succumbing to the temptation to consume than Aesop’s cautionary fable of the grasshopper and the ant. Little has changed over the millennia.

Measured by two standards, the vast majority of Americans, particularly in the last generation, have favored the values of the grasshopper over the ant, enjoy now, and worry later.

Table X-2 tracks the personal savings of Americans as a percentage of personal income.

Table X-2 Personal Saving as A Percentage of Disposable Personal Income by Year
Year	Percentage	Year	Percentage	Year	Percentage
1929	4.30%	1957	8.40%	1985	8.20%
1930	4.00%	1958	8.50%	1986	7.60%
1931	3.70%	1959	7.50%	1987	6.50%
1932	-1.10%	1960	7.20%	1988	6.90%
1933	-1.70%	1961	8.40%	1989	6.60%
1934	0.90%	1962	8.30%	1990	6.50%
1935	4.20%	1963	7.80%	1991	7.00%
1936	6.20%	1964	8.80%	1992	7.30%
1937	5.90%	1965	8.60%	1993	5.80%
1938	1.90%	1966	8.20%	1994	5.20%
1939	4.40%	1967	9.40%	1995	5.20%
1940	5.70%	1968	8.40%	1996	4.90%
1941	12.20%	1969	7.80%	1997	4.60%
1942	24.10%	1970	9.40%	1998	5.30%
1943	25.50%	1971	10.00%	1999	3.10%
1944	26.00%	1972	8.90%	2000	2.90%
1945	20.40%	1973	10.50%	2001	2.70%
1946	9.60%	1974	10.70%	2002	3.50%
1947	4.20%	1975	10.60%	2003	3.50%
1948	6.90%	1976	9.40%	2004	3.60%
1949	4.90%	1977	8.70%	2005	1.50%
1950	7.10%	1978	8.90%	2006	2.60%
1951	8.40%	1979	8.80%	2007	2.40%
1952	8.40%	1980	9.80%	2008	5.40%
1953	8.20%	1981	10.60%	2009	4.70%
1954	7.50%	1982	10.90%	2010	5.10%
1955	6.90%	1983	8.70%	2011	4.20%
1956	8.50%	1984	10.20%
Source: Data extracted from BEA, Table 2.1. Personal Income and Its Disposition.

Table X-2 shows that compared with the past, Americans are saving much less. Over the 15-year period 1982-1996, Americans saved on average 7.17%, and over the 15-year period 1997-2011, Americans saved on average only 3.67%.

Table X-3 compares America’s investment (as a percentage of national income) to other modern and emerging economies.

Table X-3 Gross National Income Less Public and Private Consumption Plus Net Current Transfers
	2001	2002	2003	2004	2005	2006	2007	2008	2009	2010
World	21.06	20.49	20.56	21.49	21.82	22.75	22.52	21.39	18.65	19.32
Australia	21.32	22.07	21.50	22.16	21.76	23.41	23.90	24.87	26.74	25.12
Austria	23.61	25.25	25.21	25.42	25.37	26.10	27.56	27.80	24.71	24.85
Belgium		24.21	23.91	24.82	24.65	25.26	26.08	24.20	20.21	22.47
Brazil	14.00	15.20	16.49	19.05	17.86	18.03	18.46	19.22	14.95	16.85
Canada	22.88	21.75	21.89	23.42	24.27	24.69	24.08	23.73	17.73	18.75
China	38.13	40.72	44.21	46.90	48.39	51.65	51.75	52.96	53.40	52.66
Czech Republic	25.26	24.24	22.14	23.60	25.91	26.21	26.62	26.40	22.65	22.52
Denmark	24.33	23.60	23.75	23.88	25.15	25.55	24.75	25.08	20.90	22.38
Finland	29.20	27.96	25.00	26.50	25.52	25.91	27.26	25.64	20.45	20.33
France	20.81	19.62	19.05	19.57	19.20	20.02	20.55	20.01	17.14	17.16
Germany	20.15	20.22	19.79	22.08	22.06	24.07	26.19	25.21	21.81	22.70
Greece	15.03	12.98	15.74	15.55	12.46	13.15	10.39	7.47	5.17	4.76
Hungary	21.00	19.36	16.73	17.84	17.65	18.48	17.03	18.21	19.69	21.46
India	25.72	26.92	28.65	33.35	34.29	35.03	36.86	33.02	34.46	33.99
Indonesia	23.65	18.94	31.08	25.77	27.37	29.13	27.15	27.34	32.28	32.88
Ireland	27.13	27.46	29.37	29.72	29.21	28.58	24.50	19.14	14.81	14.77
Italy	21.05	21.27	20.33	20.83	20.17	20.34	20.90	18.96	17.46	17.07
Japan	26.43	25.49	25.59	26.22	26.52	26.88	27.53	25.89	22.38	23.15
Korea, Rep.	31.19	30.44	31.76	33.95	32.03	30.68	30.73	30.48	30.21	31.64
Netherlands	26.15	25.40	25.10	26.61	26.05	28.15	27.77	25.26	22.20	23.63
Norway	35.07	31.34	30.15	32.82	37.27	39.38	38.35	40.71	33.08	35.22
Poland	17.71	15.88	16.38	15.81	17.60	18.12	19.68	18.98	18.11	17.53
Russian Federation	33.44	29.28	30.00	31.53	31.94	31.70	30.88	33.17	23.81	28.59
Singapore	40.16	37.80	40.26	41.71	44.13	47.51	49.92	46.70	46.58	47.65
Slovak Republic		22.09	19.22	20.68	22.03	21.47	23.82	22.37	16.61	20.38
Slovenia	25.01	24.97	24.68	25.05	25.78	26.99	28.01	25.86	21.96	22.36
South Africa	16.07	17.13	16.10	15.34	14.79	14.66	14.60	15.43	15.84	16.79
Spain	22.79	23.72	24.08	23.26	22.72	22.66	21.77	20.23	19.67	19.08
Sweden	23.23	22.53	24.23	23.80	24.85	26.51	28.32	28.19	22.94	24.51
Switzerland	29.11	28.02	30.82	31.04	31.83	33.07	30.72	24.91	30.36	33.40
Turkey	18.66	18.70	15.34	15.84	15.78	16.46	15.75	16.69	13.05	13.75
Ukraine	25.92	28.03	28.06	31.78	25.88	23.64	22.46	21.01	15.90	17.52
United Kingdom	15.00	14.94	14.77	14.74	14.13	14.08	15.44	15.11	12.55	11.90
United States	16.01	14.29	13.56	14.07	14.51	15.52	13.84	12.17	9.55	10.87
Source: Data extracted from World Bank investment statistics.

[/table]

Table X-3 shows that (as a percentage of national income) America invests much less than other leading modern and developing economies. In 2001, as a percentage of its national income, America invested 76% of the world average, but by 2010, America invested only 57% of the world average. In the race to the bottom of investment and, conversely, the top of personal consumption, America was bested only by Greece. The trend during this period pointed to a persistent American disinterest in investing matched by an appetite for consumption.

Discretionary income spent on excessive private consumption intensifies momentary sensations which fade into memory while discretionary income employed in prudent public investments creates future wealth. Ignoring public investments in favor of private consumption and private investment threatens America’s future.

TAXATION, INVESTMENT, AND CONSUMPTION

Every time the tax game is played, America decides either to tax to invest in strengthening its businesses and workforce or not to tax in order to encourage more private consumption. No one doubts that as much money as possible should be left in private hands, but also no one should doubt that under-investing in public investments can jeopardize economic growth. As America’s businesses and workforce face intensified global competition, America will have to choose whether to tax to make public investments or not to tax and encourage private consumption, particularly for the self-indulgent.

The following choices represent some of the decisions America must make that will determine its future:

Table X-4 America’s Choices
Private Consumption – The Plush, The Luxurious, and The Ostentatious for Now		Public Investment – National Strength for the Future
Oversized houses and mansions, yachts, country clubs, vacations, fine furniture, art collections, fine wine, jewelry, and other self-indulgent playthings.		Public Infrastructure for transportation, utilities, and flood control. Public and higher education subsidies to train new workers and workers displaced because of international competition. Wage, retirement, and health care subsidies to enable business to hire workers at a competitive global wage. A military and intelligence establishment that will assure national security and the safety of international trade. A government regulatory regime to maintain stable markets and a productive environment. A responsible debt to GDP ratio.
	Versus

Under-investing in public investments is no different than America sending its soldiers into war with obsolete arms. In the 21^st century, economic competition will be as knowledge-dependent as the wars of the 20^th century were kinetic. Developing and manufacturing kinetic devices comes cheap relative to developing and cultivating knowledge resources. Just as with the wars of the 20^th century, all of America’s resources must be available for deployment to win the contest. If America fails to make the same commitment to provide the public investments that will arm its businesses and workforce for the 21^st century global economic contest that it did to arm its military for the 20^th century wars, then consequences will be tragic.

There are three essentials for businesses to prosper and jobs to be created, which include (1) consumption, (2) private investment, and (3) public investment. Unless a business has consumers with money to buy its products, it will fail. Unless a business has the private investment capital to finance the property, plant, and equipment necessary to produce its products, it will fail. And, unless public investments provide a business with, among other things, an educated workforce, open and free markets, a transportation and communications infrastructure that enables it to market its products, a military that assures peaceful international commerce, a legal system that protects its contract rights, financial stability that assures the lowest cost of capital possible, and political stability that promotes economic confidence, it will fail.

Each of these three essentials constantly competes with the others for the same dollars. If any one of the three essentials get too much and the others get too little, growth will suffer. For the economy to prosper best, each of the three essentials must get what they need, relative to the others, but no more. Anytime capital is misallocated among the three essentials, growth slows, and market bubbles pop up only to be burst later by the workings of the market.

Taxes play a prominent part in striking the right balance among the three essentials in that they determine the amount of money available to make public investments. As a democratic and capitalistic society, politics decides what the level of taxes will be, and therefore, how much will be available for public investments. Every tax dollar takes money away from either consumption or private investment; every after-tax dollar spent on consumption takes money away from private investment; and every after-tax dollar spent on private investment takes money away from consumption. Since striking the right balance among the three essentials requires wisdom greater than that of Solomon, the right balance is hardly ever struck as of any moment. But over time (sometimes a very long time), the right balance among the three essentials generally (but not always) gets sorted out by both market and political forces.

Generally, job creation is a function of economic growth, and when growth is robust, so too is job creation, and the reverse is true also. So, if politics gets the amount needed for public investments wrong, growth and jobs will suffer. Too much in taxes (which starves consumption and/or private investment) slows growth and jobs just as too little in taxes to pay for public investments (which deprives business of an enabling environment) also slows growth and jobs.

During times of plenty, no one prospers more than those at the top, and during periods of want, no one suffers more than those at the bottom. For 30 years before the onset in 2008 of the Great Recession, income had concentrated at the very top with everyone else’s income remaining static or falling. During the Great Recession, those at the top had their accumulated wealth to get them through the roughest part, but for almost all others, they had only their ability to endure and a little help from the government to see them through. Since the end of the Great Recession, all income groups are doing better in terms of income but none more so than those at the top. For almost all Americans, they have yet to have their income reach pre-Great Recession levels. As Americans recovered from the Great Recession the disparity in income between those at the very top and everyone else continues as is shown in Census data released in 2016.

With income concentrating at the top and everyone else trying to catch up with where they were before the Great Recession, only those at the top have the resources to pay for America’s public investments. Since it is the very best-off who have both the biggest stake in America’s economic growth and the most income available to pay for needed public investments, it is they who will have to pay for most of them.

Taxing the Very Best Off

The myth that “you cannot tax the job creators without costing jobs” stands in the way of taxing the very best-off to pay for needed public investments. This myth makes two assumptions: first, increasing taxes on the very best-off, in and of itself, will cost jobs, and second, job creators will be discouraged or prevented from creating jobs if taxes are increased. Neither assumption has facts to support it.

If the very best-off are held harmless from paying more in taxes, then finding the revenue to pay for important public investments becomes impossible. Increased taxes should not be regarded as a penalty for being successful, but as an opportunity for the very best-off to participate in making the public investments essential to keeping America strong and competitive.

This is why the top 1% must invest in the rest of America is to remain great and become greater.

Taxing (if done right) and job creation are not mortal enemies but friends. For job creation to prosper, there must be a proper balance between public investments and private investments on the one hand, and consumption on the other hand. Taxes are only a part of the equation that affects the balance between investment (public and private) and consumption.

The myth that tax money paid by the very best-off and used to pay for public investments costs jobs ignores the economic reality that tax dollars do not just fall into a black hole and vaporize. Instead, money spent on public investment is spent on goods and services that, in turn, create jobs. So, just like money spent on consumption and private investment, money spent on public investments also contributes to economic growth. Although all money spent in the economy contributes to economic growth, not all dollars make the same contribution. Depending on the type of spending for public investment, private investment, or consumption, more or less growth and jobs will result, as shown by the following example.

Suppose that Peter, a slick and successful hedge fund manager and self-described master of the universe, has an annual adjusted gross income of $20 million. Assume that there are three choices in striking the proper balance among spending on public investments, private investment, and consumption, as follows: Scenario #1, increase Peter’s taxes by 5 percentage points, or $1 million, to pay for public investments; Scenario #2, do not increase Peter’s taxes, and have him spend the $1 million on a private investment of his choice; and Scenario #3, do not increase Peter’s taxes, and have him spend the $1 million on consumption as he sees fit.

Scenario #1 (Public Investment):

How the Money is Spent: Peter’s $1 million is spent to pay for a public investment which provides 20 low-income students of merit with grants to study engineering, math, and physics. Forty years later it turns out that, of all the students who were provided grants, 16 lived up to expectations and became productive citizens and taxpayers who on average paid $15 thousand (inflation adjusted dollars) of income taxes each year over their 30-year careers for a total of $6.75 million.

The Economic Effects: The $1 million public investment benefitted (1) the 20 students who received the grants, (2) the universities and educators that educated the 20 students, (3) the businesses which employed the students, and (4) the taxpayers who received a 675% (inflation adjusted) return on their $1 million public investment. Additionally, over the working lives of the students, they provided the skills and imagination that enabled the businesses for which they worked to attract new business from all over the world and hire many additional employees.

Scenario #2 (Private Investment):

How the Money is Spent: Peter invested the $1 million in an energy futures fund in which he made a losing bet to the effect that that in one year the price of oil would double its current price.

The Economic Effects:  The failed $1 million private investment benefitted the energy fund manager who made a 5% placement fee for selling Peter the investment. Few, if any, additional jobs were created.

Scenario #3 (Consumption):

How the Money is Spent: Peter spent the $1 million on repairing his relationship with his cranky mistress by redecorating her Manhattan apartment complete with new furnishings and artwork, buying her a new wardrobe, and taking her on a month-long grand tour of Europe.

The Economic Effects: The $1 million spend on consumption benefitted Peter’s mistress, the mistress’ favorite decorator and art dealer, several very upscale New York and Paris couturiers, Peter’s travel agent, and several five-star European hotels. Few, if any, additional jobs were created.

In each of the scenarios, the $1 million rippled through the economy and benefitted various types of businesses and organizations. Regardless of whether the money spent on public investments, private investments, or consumption is considered wise, all of it has the potential to create more or less jobs depending on how it is spent.

The examples that follow show a few of the types of spending choices available to the very best-off and their effects on job creation:

Public Investments: (1) the construction of highways, roads, bridges, and ports which create construction jobs and facilitate commerce; (2) the construction of naval assets to protect the sea lanes which create manufacturing and technology jobs and additional military employment and facilitate international commerce; (3) the maintenance of income transfer programs, such as Social Security, Medicare, Medicaid, health care exchange subsidies, unemployment compensation, and food stamps which put money in consumer’s pockets enabling them to buy goods in private markets, relieve business of the burden of factoring these costs into the wage base, and maintain political stability; (4) the funding of loans and grants to students of merit to enable them to obtain needed post-secondary education to improve the quality of America’s workforce which leads to competitive, job-creating businesses ; (5) the maintenance of a system of law enforcement and civil and criminal justice administration which provides for the rule of law and economic growth; and (6) the funding of basic research in technology and medical science for the purpose of maintaining American leadership in technological advancement which creates technology jobs and makes new industries possible.

Private Investments: (1) the purchase of a stock in the secondary market which keeps a broker employed; (2) the purchase of a stock in a startup company which keeps a broker employed and may lead to the creation of new jobs; (3) the purchase of a debt or an equity security used to restructure the capital of an existing company which keeps a broker employed and may lead to the creation of new jobs; (4) the purchase of an equity security used to speculate in commodities markets which keeps a broker employed and may lead to the creation of new investment banking jobs; (5) the purchase of an equity security used to finance the construction of a new commercial property which keeps a broker employed and creates construction, maintenance, and managerial jobs; (6) an investment in a venture capital fund which keeps a broker employed and may lead to job creation in a number of technological areas; and (7) a purchase of collectibles, such as fine art, antiques, or other rare items, which keeps brokers employed.

Consumption: (1) entertainment, including five-star restaurants and hotels, the theatre, the cinema, the opera, and the symphony, which creates jobs in these industries; (2) recreation, including country clubs, golf, tennis, and personal trainers, which creates jobs in these services; (3) vacations, which create jobs in the travel industry; (4) general living standard, including luxury housing and upscale automobiles which create jobs in both the luxury housing and auto industries; (5) personal service which creates jobs for maids, lawn care workers, nannies, and other types of servants; (6) unlimited health care, including cosmetic surgery, which creates jobs in the health care industry; and (7) unlimited private education for all children from pre-school through graduate or professional school, which creates jobs for educators and provides an educated workforce.

Since each of the three of the essentials—public investment, private investment, and consumption—all compete for each available dollar, the effect on job creation depends on what choices are made. Sometimes more jobs will be created if the next available dollar is spent on public investment, sometimes private investment, and sometimes consumption. From a job creation standpoint, each expenditure must be evaluated on its own merits. Reason and experience, however, dispel the myth that taxing the very best-off to pay for public investments inevitably results in job loss.

The Very Best-Off and Job Creators

Those who argue that the very best-off are over-taxed oftentimes equate all of them with the so-called job creators and do not define who job creators are, how many of them there are, or how much they pay in taxes. The only clue as to who they may be is that they are the owners of small businesses who are required to treat business income as personal income. Complicating matters, there is not just one definition of what a small business is but many, and not all owners of small businesses are among the very best-off. Most owners of small businesses are like most Americans, struggling mightily to earn enough to have a middle-class standard of living, a decent retirement, adequate health care, and the opportunity for their kids to go to college without coming out as debt-slaves. To the vast majority of these owners of small businesses, giving up the public investments that help them maintain a decent standard of living, have health care, retire in some dignity, and get their kids educated in exchange for cutting taxes for the very best-off smacks of a lousy deal.

Before focusing on owners of small businesses as part of the very best-off, it is important to put into perspective who the very best-off are. The very best-off include the top 1% of all taxpayers, roughly about 1.48 million in 2014 of whom 1.25 million had an adjusted gross income of at least $500 thousand and the others not much less. Since neither the IRS nor any official government agency identifies the composition of who makes up the very best-off in terms of the type of their business or profession, it is a matter of educated speculation as to who the very best-off are. It is a safe guess, however, that among the very best-off are the following: CEOs and other senior officers in leading companies, the most successful movie stars, entertainers, and athletes, lottery winners, trust-fund babies who inherited their fortunes and have yet to lose them, successful technology entrepreneurs like Mark Zuckerberg, some owners of small businesses, and a mishmash of others. With respect to job creation, some of the very best-off are in businesses that hire workers, and others are simply rich people who participate in job creation only when they consume or privately invest.

SMALL BUSINESS AND JOB CREATION

Since the myth defines the owners of small businesses as job creators, debunking the myth begins with an understanding of how small businesses view job creation, what small businesses are, how they are taxed, and what taxes have to do with job creation. Although many government agencies define small businesses for tax and regulatory purposes and for the purpose of dispensing of government favors differently, the most commonly accepted definition comes from pages of abstruse regulations promulgated by the Small Business Administration, aka the SBA. After defining what constitutes a small business, it is then necessary to look at how taxes are paid on small business income and what their significance is as a part of the personal income tax.

Small businesses are like all businesses in that they are in the business of making a profit, not hiring employees just for the sake of hiring employees. If a small business decides that it needs to add an employee to increase its profit, it does so, and if it decides that it needs to fire an employee to increase its profit, it does that too. Sometimes a small business can increase its profit by replacing employees with technology, such as new software programs or robots, and sometimes a small business can replace American workers by outsourcing to cheaper foreign labor. So, small businesses sometimes are job creators, sometimes job destroyers, but always profit seekers.

There is no dispute that small businesses drive much of employment in the economy. A 2009 SBA report to the President emphasized the importance of small businesses to employment as follows:

“Small businesses employ about half of U.S. workers. Of 115.1 million non-farm private-sector workers in 2004, small firms with fewer than 500 workers employed 58.6 million and large firms employed 56.5 million. Firms with fewer than 20 employees employed 21.2 million, and firms with 100 employees, 41.8 million…. [S]mall firms create 60 to 80 percent of net new jobs.”

So, lowering unemployment and keeping it low depends significantly on a healthy and prospering small business sector.

Since the SBA definition determines which businesses qualify for certain small business subsidies and loan guarantees, it is the politicians, not the economists, who do the defining—dispensing government favors is too important for politicians to leave to economists. Generally, politicians on the left who like to hand out federal benefits, as well as politicians on the right who like to dole out tax preferences (in each case to small businesses), like a liberal definition of what constitutes a small business.

Sifting through reams of SBA regulations, two basic criteria emerge for how it defines a small business. For most manufacturing and wholesale businesses, the standard is having no more than 500 employees, and for various types of service and retail businesses, the standard is having annual gross business receipts ranging from $7 million to $29 million per business, with $7 million applying to most local retail and service businesses and $29 million applying to larger retail businesses. Neither of these two criteria has much to do with mom and pop businesses, most of which have 20 or fewer employees and less than $2 million in business receipts.

For tax purposes, the overwhelming majority of small businesses organize as S corps, partnerships or limited liability companies (which as a group are commonly referred to as “pass-thru entities”), and pass-thru their business income to the owners who then pay income taxes on these business profits at personal income tax rates. The owners of the most profitable small businesses pay income taxes on small business profits at rates of 37%. Although almost all small businesses organize as pass-thru entities, many pass-thru entities are not small businesses. A substantial majority of income attributable to pass-thru entities, moreover, comes from businesses that hardly could qualify as small businesses, even under the expansive SBA standard.

The IRS does not classify pass-thru entities either as small businesses or by the number of their employees, but it does classify them by the size of their business receipts and, in some instances, the size of their assets. Occasionally, tax experts, the IRS, or Congress conduct special studies to learn more about the attributes of small businesses in terms of their net income and employment characteristics. One such study, prepared in 2005 by the IRS, broke down the net income of pass-thru entities by the size of their business receipts. Another such study, prepared in 2007 by tax experts for presentation to the 2007 National Tax Conference, broke down small businesses with less than $1 million in assets by the number of their employees. Additionally, the IRS prepares annually certain reports regarding the net income and other data relating to certain pass-thru entities.

Table X-5 shows the percentage of pass-thru income attributable to small businesses (classified by size of business receipts), as reported in the 2005 IRS study based on 2002 tax data.

Table X-5 Pass-Thru Entities Net Income Classified by Size of Business Receipts – 2002
Business Receipts Categories	S Corp Net income (less deficit)	Percentage of S Corp Net Income (less deficit)	Partnership Net Income (less deficit)	Percentage of Partnership Net Income (less deficit)	All Pass-Thru Net Income (less deficit)	All Pass-Thru Percentage of Net Income (less deficit)
Total	$150,600,000,000	100.00%	$270,700,000,000	100.00%	$421,500,000,000	100.00%
<$25,000	-$8,400,000,000	-5.58%	-$34,900,000,000	-12.89%	-$43,300,000,000	-10.27%
$25,000 <$250,000	$9,400,000,000	6.24%	$13,600,000,000	5.02%	$23,000,000,000	5.46%
$250,000 > $1,000,000	$24,100,000,000	16.00%	$25,100,000,000	9.27%	$49,200,000,000	11.67%
$1,000,000 > $5,000,000	$33,300,000,000	22.11%	$35,700,000,000	13.19%	$69,000,000,000	16.37%
$5,000,000 > $10,000,000	$16,300,000,000	10.82%	$19,500,000,000	7.20%	$35,800,000,000	8.49%
$10,000,000 > $50,000,000	$37,600,000,000	24.97%	$50,800,000,000	18.77%	$88,400,000,000	20.97%
$50,000,000 >	$38,400,000,000	25.50%	$161,000,000,000	59.48%	$199,400,000,000	47.31%
Source: Data extracted from An Analysis of Business Organizational Structure and Activity from Tax Data, Tom Petska, Michael Parisi, Kelly Luttrell, Lucy Davitian, and Matt Scoffic, Internal Revenue Service, 2005, pages 20-21.

As shown in Table X-5, net income for all pass-thru entities is highly concentrated in the largest entities (classified by size of business receipts). S corps and partnerships with business receipts in excess of $10 million (businesses that clearly fail to qualify as small businesses) account for 68% of all pass-thru net income, and S corps and partnerships with business receipts less than $5 million (businesses that most likely would qualify as small businesses) account for only about a third of pass-thru net income.

In terms of generating pass-thru income that is subject to taxation, small businesses most likely provide less than one-third of what there is to tax.

Table X-6, summarizing an IRS report showing the net income of partnerships (classified by asset size), confirms that it is businesses other than small businesses that provide the two thirds or more of partnership pass-thru income subject to taxation.

Table X-6 Partnership Net Income and Assets Classified by Asset Size – 2008
Asset Sizes	Number of Partnerships	Percentage of Partnerships	Total Assets	Percentage of Assets	Total Net Income (loss)	Percentage of Net Income (loss)
All Asset Sizes	3,146,006	100.00%	$19,259,803,843	100.00%	$458,185,323	100.00%
>$0 >$10,000,000	3,017,671	95.92%	$2,234,820,597	11.60%	$102,016,084	22.27%
$10,000,000> $25,000,000	70,811	2.25%	$1,099,857,537	5.71%	$19,173,851	4.18%
$25,000,000> $50,000,000	25,072	0.80%	$872,785,358	4.53%	$19,674,606	4.29%
$50,000,000> $100,000,000	14,272	0.45%	$994,910,021	5.17%	$23,021,995	5.02%
$100,000,000 >	18,180	0.58%	$14,057,430,330	72.99%	$294,298,787	64.23%
Source: Data extracted from IRS Tax Stats, Table 15. All Partnerships: Total Assets, Trade or Business Income and Deductions, Portfolio Income, Rental Income, and Total Net Income, by Size of Total Assets, 2008.

As shown in Table X-6, partnerships with assets of $10 million or more (businesses unlikely to qualify as small businesses) account for 77% of partnership net income leaving partnerships with less than $10 million in assets accounting for only 23% of partnership net income.

Table X-7 shows the employment characteristics of small businesses with assets of no more than $10 million that were surveyed in the 2007 study presented at the National Tax Conference.

Table X-7 Small Businesses (*) Classified by Assets and Number of Employees
Asset Brackets	No Employees	1 to 5 Employees	6 to 10 Employees	11 to 15 Employees	16 to 25 Employees	26 to 50 Employees	More than 50 Employees	Total Small Businesses
$0 or less	1,147	214	18	8	3	(**)	4	1,394
$1 to $50,000	1,104	758	112	46	24	7	2	2,053
$50,001 to $100,000	325	284	102	40	13	12	3	779
$100,001 to $500,000	787	406	229	110	74	61	16	1,683
$500,001 to $1,000,000	286	50	57	27	46	24	23	513
$1,000,000 to $10,000,000	443	62	50	37	66	86	73	817
Total Small Businesses	4,093	1,773	567	269	227	191	122	7,242
Source: Data extracted from Estimates of U.S. Federal Income Tax Compliance for Small Businesses, presented at the 2007 National Tax Association meetings, Columbus, Ohio, DeLuca, Donald, John Guyton, Wu-Lang Lee, John O’Hare, and Scott Stilmar, Table 1.
Notes: * Small businesses in thousands. ** Less than 1,000 businesses.

As shown in Table X-7, many entities categorized as small businesses have no employees. Of the 817 thousand small businesses with assets of $10 million to $1 million, 54% have no employees, and looking at all 7.242 million small businesses included in the survey, 57% have no employees. Many pass-thru entities engage in activities such as holding and investing in assets that do not require employees.

The data included in Tables X-5, X-6, and X-7 can be summarized as follows:

• More than two-thirds of pass-thru income comes from pass-thru entities that it is highly unlikely would qualify as small businesses.
• Over one-half of businesses with assets of $10 million or less do not have any employees.

Although the small business tax data does not correlate to the SBA small business definition, less than one-third of pass-thru entity income can at best reasonably be attributed to small business.

Small Business Income in Perspective

Not only does less than one-third of pass-thru income come from small businesses, but it accounts for only a tiny sliver of the total adjusted gross income of all taxpayers in the top two rates. The myth that tax rates cannot be increased on those paying the top two rates without harming job creation in small businesses offers a convenient excuse not to raise revenues from the best-off taxpayers, including those who have no ownership in small business.

Table X-8 shows the taxpayers (classified by the size of their adjusted gross income) who report pass-thru income and the amount of pass-thru income relative to all adjusted gross income. Virtually all taxpayers with adjusted gross income of $200 thousand or more pay their taxes at the top two rates.

Table X-8 Partnership and S Corporation Net Income for 2008 Shown for Groups of Taxpayers Based on Adjusted Gross Income
Size of Adjusted Gross Income	Taxpayers	Percentage of Taxpayers	Pass-Thru Net Income*	Percentage of Net Income
Taxable Returns, total	4,145,032		$463,801,344
No Adjusted Gross Income	1,091	0.03%	-$570,076	-0.12%
$1 under $5,000	13,200	0.32%	$3,686	0.00%
$5,000 under $10,000	14,589	0.35%	$10,438	0.00%
$10,000 under $15,000	36,209	0.87%	$203,177	0.04%
$15,000 under $20,000	49,736	1.20%	$375,842	0.08%
$20,000 under $25,000	62,821	1.52%	$416,475	0.09%
$25,000 under $30,000	76,913	1.86%	$764,150	0.16%
$30,000 under $40,000	149,075	3.60%	$976,235	0.21%
$40,000 under $50,000	156,128	3.77%	$1,218,321	0.26%
$50,000 under $75,000	525,030	12.67%	$7,511,767	1.62%
$75,000 under $100,000	527,252	12.72%	$9,255,394	2.00%
$100,000 under $200,000	1,200,523	28.96%	$43,626,959	9.41%
$200,000 under $500,000	884,980	21.35%	$91,320,429	19.69%
$500,000 under $1,000,000	271,082	6.54%	$76,288,303	16.45%
$1,000,000 or more	176,404	4.26%	$232,400,247	50.11%
Source: Data extracted from IRS, Tax Stats, July 2009, Individual Income Tax: Business or Partnership, Size of Adjusted Gross Income for 2008.
Note: * Income in thousands.

As shown in Table X-8, $400 billion, or 86% of all pass-thru income, is concentrated in taxpayers whose income is $200,000 or more, and 50% of such income is concentrated in taxpayers whose income is $1,000,000 or more. At best, one-third of this $400 billion of income comes from small businesses, and an infinitesimal amount of that comes from mom and pop businesses.

Table X-9 shows taxpayers classified by adjusted gross income with and without pass-thru income.

Table X-9 Number of Taxpayers with Adjusted Gross Income (AGI) in Certain Categories – 2008 (millions)
Taxpayers	Number	AGI Exclusive of Pass-Thru Income	AGI Attributable from Pass-Thru Income
All Filers	142,450,569	$8,262,860,170	$542,454,108
Filers with Taxable Income	90,660,104	$7,583,461,595	$526,944,982
Filers with $200,000 or More AGI	4,375,659	$2,462,007,964	N/A
Filers with $200,000 or More AGI Having Partnership and S Corp Income	1,336,736	N/A	$446,954,373
Source: Data extracted from IRS, Tax Stats, Table 1. All Returns: Sources of Income, Adjustments, Deductions and Exemptions, by Size of Adjusted Gross Income, Tax Year 2008.

As shown in Table X-9, there are about 4.37 million taxpayers with $200,000 or more of adjusted gross income who account for a total of $2.46 trillion of adjusted gross income. Within this group, there are about 1.34 million taxpayers, or about 31%, who account for $447 billion of pass-thru income. And, of this pass-thru income, only about one-third, or $131 billion, is likely to come from small businesses. All of this means that the myth-makers are seeking to shield over three million high-income taxpayers (who account for about $2.14 trillion of adjusted gross income) from any increase in tax rates even though these taxpayers have no small business income.

Shielding $2.14 trillion of adjusted gross income from an assumed five percentage point tax increase takes about $106 billion in revenue off the table. If this revenue does not come from the very best-off taxpayers, it must come from those less well-off—just one example of the stakes in who wins and who loses the tax game.

Simple Solutions and Hidden Agendas

Had there been any truth to the pretense that increasing the top personal income tax rates would kill small business jobs, a simple solution could have raised necessary revenues without affecting small business owners. Small business owners could be protected from tax rate increases without allowing the rich to amend the tax laws to define what constitutes a small business for tax purposes and then setting a ceiling for the highest tax rate that would apply to pass-thru income attributable to these businesses.

Such a solution would have raised billions in revenue from wealthy taxpayers, such as movie stars, sports figures, hedge fund operators, big shot lawyers, bankers, and accountants who can afford to pay higher taxes while leaving owners of small businesses unscathed. The failure of interest groups (who oppose an increase on the top two rates for all on the pretense that it would harm small businesses) to tax those wealthy taxpayers who do not own a small business exposes the real agenda of these groups: to protect the rich at all costs.

TAX RATES AND JOB CREATION

Facts have established that tax rates up to 50% (and maybe higher) have no material effect on the willingness and ability of individuals to work for the next buck, as opposed to opting for a siesta. There is no reason to suppose that a tax rate of 40% on owners of successful small businesses will dampen their incentive to grow their businesses. For those who fear that many small business owners will choose not to chase after new customers because they will only get to keep 60 cents on the next dollar of profits, they lack confidence that greed, pride, and industry will assure that others will fill the void. History proves that only the foolish bet against the greed, pride, and industry of small businesses. So, if a 40% tax rate results in a few lazy small businesses deciding to give up the chase, it is a good bet that plenty of others will seize the opportunity.

Tax experts have conducted studies and found that increasing tax rates on small business owners affect only a few businesses. As an example, William Gale of the Tax Policy Center wrote an article, “Small Business and Marginal Income Tax Rates,” dated April 26, 2004, which concluded as follows:

“First, few small business owners face the highest marginal income tax rates. Less than 9 percent of returns with small business income are in tax brackets of 28 percent and above, less than 3 percent face rates of 33 percent and above, and only 1.3 percent are in the top bracket. Roughly 97 percent of small businesses would not be affected at all by increases in the top two tax rates. More than two-thirds of all returns with small business income are in the 15 percent or lower tax bracket, and 88 percent face rates of 25 percent or below.

Second, business income is not the dominant form of income in any positive tax bracket. It totals one-third of income in the top bracket, less than one-quarter in the second bracket, and smaller shares at every other positive tax rate.

Third, although many returns in the top two brackets have at least some business income, few returns have most of their income from small businesses. For only about one-third of households in the top bracket and one-fifth in the second bracket is more than half of their income from business income.”

Tax rates at up to 50% will affect only a few small businesses, and there is no proof that it will slow job creation.

Belying the myth that taxes cannot be increased on the very best-off because it will result in job creators not adding jobs are the following facts:

• Most of the very best-off who pay the top personal income tax are not owners of small businesses;
• Owners of small businesses are not in the business of creating jobs unless it is in their interest to do so, and many times it is not;
• The overwhelming amount of income that is subject to being taxed at relatively high rates does not come from small businesses; and
• There is no evidence that having the owners of a successful small business pay a personal income tax rate of 50% will prevent them from adding jobs if it is otherwise in their interest to do so.

Perpetuation of this myth serves only to shield the very best-off from paying higher taxes, the effect of which is to prevent the revenue being available to make essential public investments. The level of taxation and who gets taxed will play out in the politics of the tax game. Since politics, and not economics, decides who the winners and losers are in the tax game, and since myths are powerful political weapons, politics demands dispelling the job creator taxing myth. Unless this myth is dispelled, it will be almost impossible for the politics of the tax game to permit increasing taxes on the very best-off to pay for public investments.