House and Senate Offer Different Visions for Tax Policy

I recently sat down in Norman with a group of small business owners to get their perspective on economic issues. While politicians in Washington argue over how to create jobs, these local employers are the ones responsible for making payroll each month and working to make their businesses grow in a challenging economy.

The most common sentiment was frustration with the increasing costs and paperwork headaches required to run a business these days. The uncertainty created by the government stalemate over tax policy certainly doesn't help. With the current low tax rates set to expire at the end of the year, Norman business owners may be hit with a massive tax hike in January 2013. Until we know the outcome of the tax debate in Washington, it is very difficult to plan for the future.

House Republicans and Senate Democrats recently approved two competing responses to the looming tax hikes. Joined by 19 Democrats, House Republicans passed the Job Protection and Recession Prevention Act on August 2. This bill would keep all the current tax rates in place, ensuring that no American family or small business will be hit with a tax increase next year. Days earlier, Senate Democrats approved President Obama's plan to raise taxes on individuals earning $200,000 and couples with incomes of $250,000.

What tax hike proponents fail to mention is that 50 percent of small business income is taxed at individual rates. Consequently, the Senate plan is actually a tax on job creators. Accounting firm Ernst and Young just released a study that found the president's tax increases will cause 710,000 Americans to lose their jobs, while wages will fall by 1.8 percent. The report's findings are based on the fact that businesses organized as S corporations and similar categories taxed at individual rates employ 54 percent of the private sector work force -- more than 20 million people. Hitting these companies with tax increases couldn't help but have a significant effect on the economy.

As harmful as the Senate-passed tax increases would be, the damage would be even greater if tax relief expires for all income brackets. If Congress and President Obama fail to reach agreement by the end of the year, every working American will be hit with a tax hike. The total bill for the tax increases would be $384 billion in the first year and $4 trillion over 10 years. To put that in perspective, a family of four earning $50,000 a year would see their taxes go up by $2,200. According to the Congressional Budget Office, across-the-board tax increases could contribute to the loss of between 2 and 3 million jobs.

We know that Democrats and Republicans have a philosophical disagreement about tax policy, but this is no time for a philosophical debate. The July jobless report marks the 42nd straight month the unemployment rate has been above 8 percent, while the latest GDP numbers show the economy's growth rate is a weak 1.5 percent. A tax hike is the last thing American families and job creators need.