Get All Access for $5/mo

Millionaire's Tax Could Stall Small-Business Jobs Engine (Opinion) Policymakers fail to see how a surcharge tax on the wealthy could hurt the employment and economic growth that small businesses generate.

By Scott Shane Edited by Dan Bova

Opinions expressed by Entrepreneur contributors are their own.

A Millionaire's Tax Surcharge Could Stall the Small-Business Jobs Engine (Opinion)Guest op-ed contributor Scott Shane is a professor of entrepreneurial studies at Case Western Reserve University. He writes about entrepreneurship and innovation management, among other things.

The Obama administration misunderstands how to help small businesses drive economic growth and employment because it assesses the impact of tax increases on small business with political rather than economic measures. A recent blog post by Assistant Treasury Secretary Jenni LeCompte focuses on the number of small business owners who would be affected by a tax increase rather than the impact on small business economic activity.

LeCompte explains that roughly 1 percent of small company owners would have to pay a proposed 3.25 percent tax increase on incomes in excess of $1 million, citing a recent paper by Treasury's Office of Tax Analysis. That makes the surcharge good politics: 99 percent of small business owners won't be affected. If they vote their pocketbooks, then the proposed tax increase wouldn't sacrifice many votes.

However, the number of small-business owners affected by a tax is the wrong measure if you are concerned about its effect on economic activity. To assess that, you need to know how the tax affects the employment and economic growth that small businesses generate.

Related: Looking to Pay Less in Taxes? Consider a Health Savings Account

Indeed, much research has concluded that tax increases have a negative effect on small business employment and investment. A study by Robert Carroll, formerly of the Treasury Department's Office of Tax Analysis and now with the Tax Foundation, and colleagues shows that each 10 percent reduction in small-business owners' after-tax personal income reduces the odds that their companies will add employment by 10 percent. Another of his papers reveals that a 1 percent rise in small-business owners personal tax rate is associated with a 10 percent decrease in capital investment.

Because of the way capitalism works, the proposed tax surcharge will affect a much larger amount of small business economic activity than the tiny fraction of small business owners it will hit. It's really quite simple: Small-business owners who make more money tend to hire more people and contribute more to GDP than those who earn less.

How much would small-business hiring suffer if the surcharge were imposed? We don't have employment data based on the earnings of small-business owners. But related data suggest it's a lot more than the 1 percent.

Related: How to Survive a Tax Audit

My back of the envelope calculations show that about one-fifth of all private-sector workers are employed in small-businesses whose owners could be hit by the surcharge. To reach that conclusion, I assume that small businesses whose owners earn more than $1 million per year have at least $5 million per year in sales but no more than $45 million. And Census data show that 19 percent of the private-sector labor force worked for businesses with between $5 million and $45 million in sales in 2007, the latest year data are available.

If you want to judge the true impact of the tax, you need to consider the most telling measure. Instead of the number of small-business owners affected, think about the many people who work for them who would be hurt by the tax. That number is surely substantially larger.

Related: How to Make Sure Your Business Isn't Paying Too Much in Sales Tax

Scott Shane

Professor at Case Western Reserve University

Scott Shane is the A. Malachi Mixon III professor of entrepreneurial studies at Case Western Reserve University. His books include Illusions of Entrepreneurship: The Costly Myths That Entrepreneurs, Investors, and Policy Makers Live by (Yale University Press, 2008) and Finding Fertile Ground: Identifying Extraordinary Opportunities for New Businesses (Pearson Prentice Hall, 2005).

Want to be an Entrepreneur Leadership Network contributor? Apply now to join.

Editor's Pick

Business News

Some Car Dealerships Are Selling Cars the Old Fashioned Way Following Massive Cyberattack

CDK software services an estimated 15,000 dealerships in the U.S.

Business Ideas

63 Small Business Ideas to Start in 2024

We put together a list of the best, most profitable small business ideas for entrepreneurs to pursue in 2024.

Business News

Jack Dorsey Says It Will Soon Be 'Impossible to Tell' if Deepfakes Are Real: 'Like You're in a Simulation'

Dorsey said we will "not know what is real and what is fake" in the next five to 10 years.

Business News

50 Cent Once Sued Taco Bell for $4 Million. Here's How the Fast-Food Giant Got on the Rapper's Bad Side.

The brand suggested that 50 Cent change his name to match its "Why Pay More?" value menu promotion prices. The rapper was not amused.

Business News

Mark Cuban's Google Account Was Hacked By 'Sophisticated' Bad Actors

The "Shark Tank" star said someone "called and said I had an intruder and spoofed [Google's] recovery methods."

Business News

Apple Is Working on Making Its $3,499 Vision Pro More Affordable — and Mainstream. Here's How.

Apple's product is at least three times more expensive than Meta's version.