Life, Death and Taxes

Published Jan 14, 2017. By Eileen Mozinski Schmidt. In Debuqe Iowa Telegraph.

The deadline is approaching quickly.

Tax cuts enacted nearly a decade ago when former President George W. Bush was in office are set to expire at the end of this year.

President Barack Obama wants to extend the majority of the cuts, except those for individuals making more than $200,000 and joint filers making more than $250,000 in adjusted gross income.

The proposal has largely been opposed by Republicans, who say failing to extend those cuts would hurt small businesses.

As the partisan wrangling over the debate reaches a fever pitch, some in the tri-state area say the multifaceted issue -- at the heart of which is how to best aid an economy still in recovery -- is not easily solved.

Some in the local business community say the extinction of the tax cuts would hamper their ability to survive and grow in an economy laden with challenges.

Others point out that if the tax breaks are allowed to continue, the national economy might limp along into the next decade, creating long-term problems for both individuals and businesses.

S-corps

William Gale, a senior fellow at the Brookings Institution and co-director of the Urban Brookings Tax Policy Center, said the number of small businesses actually impacted by the increase in taxes would be small.

About 2 percent of tax returns reporting small-business income are filed by taxpayers in the top two income brackets, he said.

"If the objective is to help small businesses, continuing the Bush tax cuts on high-income taxpayers isn't the way to go -- it would miss more than 98 percent of small-business owners and would primarily help people who don't make most of their money off those businesses," Gale wrote in a Washington Post article.

But those numbers don't include small businesses that are taxed as individuals.

At Greater Dubuque Development Corp., Dan McDonald said many area business owners are concerned about the proposed tax-cut expiration.

"Their ability to expand would be hurt by this," said McDonald, vice president of existing business at Greater Dubuque.

In addition to the nation's wealthiest individuals, McDonald said there are many area family-owned businesses, or S-corporations, that would be impacted by the expiration of the tax cuts.

S-corporations, or sole proprietorships, are taxed on an individual level, so any business making more than $250,000 would be taxed at a much higher rate if the tax break expired.

"They're not some big, multi-national conglomerate," said McDonald, who stressed that opposition to the tax increase he has heard locally has not been

fueled by the same partisan rancor frequently heard on the national level, but instead is based on the policy proposal itself.

Uncertainty

Dubuque Area Chamber of Commerce officials did not respond to requests for comment from the TH.

But the U.S. Chamber of Commerce is promoting the position that all the tax cuts for all groups should be preserved.

"Increasing taxes now will undermine economic recovery, choke off job creation and take money out of the hands of the individuals and businesses that create jobs, spur investment, boost consumption and promote economic growth," said a statement by the national chamber.

Debate over equipment depreciation schedules raised concerns among local business owners in recent weeks, according to

McDonald, who said many Dubuque businesses have made large equipment purchases in the past four or five years likely thanks to higher write-off rates.

The expensing limit was set to drop from $250,000 to just $25,000 next year.

But last week, President Obama signed the Small Business Jobs Act of 2010 into law, which will allow businesses to immediately write off up to $500,000. The level of investments at which the write-off phases out is at $2 million.

The law is effective through 2011.

At Giese Manufacturing, controller Marvin Heiderscheit said the law might entice more businesses to make equipment purchases, and will be especially helpful to those in the market looking for new equipment.

"It could have a positive impact," he said.

The rules regarding write-offs have been changed in the past, Heiderscheit said, and overall the government has been increasing the levels of write-offs and the phase-out level.

But he said there is still a lot of uncertainty for businesses, since the new law only goes through next year and because ongoing changes in legislation have some business owners on edge.

There might be more changes coming, Heiderscheit said, following the November elections.

"It's really hard for people involved in (business) taxes to make predictions anymore. It's hard for businesses to plan. I think a lot of people are sitting now doing nothing because they don't know what's going to happen," he said.

'Struggling small-business people'

Jeff Theis, managing partner and president of Schieffer Company International LC in Peosta, says the characterization of businesses as very wealthy is often inaccurate.

"Many small-business owners who are part of the 'rich,' as they refer to it, don't take a dividend from their company.

"The so-called wealthiest 2 percent of Americans, many of those are struggling small-business people who live on a small percent of income, opting instead to grow their company," he said.

Schieffer Company International in Peosta is a subsidiary of Schieffer International Group, headquartered in Lippstadt, Germany.

The company, which bills itself as a medium-sized company with a staff of 450, also has locations in Israel and Romania. The company produces rubber and plastic systems and flexible hose systems.

Theis said company leaders at Schieffer have not taken so much as a penny out of profit distribution, except to pay taxes and to invest in the growth of the company.

Schieffer expanded in Peosta in late 2009 and early 2010, adding 15 jobs.

Theis said he couldn't say those additions were directly related to the tax levels at the time, but he said the tax break likely did play some role.

What Theis does know is that the company's expansions have created local jobs and that the company is in the process of another expansion that will create 15 more jobs.

Theis points to this as evidence that the "greed" frequently attributed to businesses and corporations is misplaced.

"The reality is most small businesses are struggling just to survive in the global economy. The assumption that profit is always taken doesn't hold water," he said.

Income disparity

Others say extending the breaks for the wealthiest tax bracket means more economic damage to everyone, including businesses, in the future.

"While extending the tax cuts, albeit deficit-financing them, may have a positive effect on the economy through 2012, the impact is negative in 2013 and beyond because larger budget deficits reduce investment in productive capital, resulting in smaller capital stock," said Sara Imhof, Midwest regional director for the nonpartisan Concord Coalition.

She said extending the full range of tax cuts would equal $2.7 trillion in additional federal debt over the next decade.

A better solution, Imhof said, is tax reform. She said reform could create a broader tax base that "provides sufficient revenues to cover government expenses."

And the tax bracket slated for potential expiration also includes the country's wealthiest individuals.

It is a group that has done very well in the last decade, especially when compared to how the middle class and poor have been faring, according to Laddie Sula, a professor of economics at Loras College.

Sula noted a recent study showing the distribution of income in the United States has not been so unequal since the Great Depression.

Additional recent numbers support his claim.

The U.S. Census Bureau reported this month that income

inequality is at its highest level since the government began tracking household incomes in 1967.

The international Gini index reported that the U.S. has the greatest disparity in income levels among Western industrialized nations.

And the overall poverty rate in the U.S. is now 14.3 percent, or more than 45 million people, the highest level since the 1960s, the Census Bureau reported.

Until more Americans are out of poverty and have more disposable income, the lack of demand for products will remain a bigger problem for businesses than their tax levels, according to Sula.

Continuing tax breaks in the absence of consumer demand will be of little use.

"We have unemployed workers, unemployed factories, we have the capacity to produce, the problem is there's not enough demand for products," Sula said.

And he objected to the argument that the nation's wealthiest people own businesses and therefore will put money saved through tax breaks into hiring.

There is not clear research showing that connection, Sula said.

"Are they going to create jobs or are they going to go on cruises to the Pacific somewhere?" he asked.

Middle Ground

Sula agreed that some small businesses will be negatively affected by the proposed tax-cut expiration, but questioned how many.

"Does that mean it's going to cost five jobs in the Dubuque area or 200 jobs in the Dubuque area?" Sula asked.

And the proposed increase in taxes would not happen in a vacuum, Sula said. Additional economic impact would follow.

There are other ways to encourage hiring through tax policy, like cutting the payroll tax, Sula said.

He said the payroll tax is the highest tax poor people pay, so cutting it would allow consumers to have more money to spend while also providing a break to businesses.

Sula said there might be other middle-ground options, like taxing business owners who keep excess profits for their own use and giving a break to those who keep that money invested in the company.

But McDonald suggested that such compromises seem unlikely in the current political atmosphere.

"I'm sure there could be a lot of positive, constructive discussions to be had," he said. "It's not going to happen in the climate we have right now."