The Obama administration is proposing to pay for a payroll tax cut extension with a 3.25% surcharge on incomes above $1 million. This, obviously, is not an idea that Republicans like. As usual, one argument they're making is that this will hurt small businesses. Assistant Secretary Jenni LeCompte takes to the virtual pages of the Treasury Department's in-house blog to note that only one percent of small business owners have an adjusted gross income of over $1 million a year. You can see a detailed discussion from the Office of Tax Analysis if you like, but really it should be pretty obvious. There are lots of small businesses in America, and very few people who earn over $1 million a year, so obviously very few small business owners are earning twenty times the median household income.
The question I always have in these controversies, however, is what difference does it make? My assumption is that the guy who owns the liquor store across the street from my apartment is earning a pretty modest living with his modest small business. But what if he's actually earning $5 million a year? Why would that matter for tax policy?
The presumption seems to be that taxing small business owners would hurt small business hiring. But this is mistaken. If hiring an extra worker will increase a firm's profits, then the firm should hire the extra worker. Taxing the owner's income can't turn a profitable hire into an unprofitable one, and thus should have no impact on hiring. Note that this is in contrast to many other kinds of taxes! It's easy to imagine scenarios in which changes in sales taxes or changes in payroll tax turn profitable hires into unprofitable ones. But that analysis only serves to further indicate that swapping a payroll tax extension for a millionaire's surtax will have beneficial labor market impacts on the supply side and the demand side. Quibbling over whether these are millionaire lawyers or millionaire basketball players or millionaire liquor store owners is irrelevant.