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Paul Krugman Wants To Penalize Job-Creating Entrepreneurs With Higher Taxes

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Posted on August 24 2010 3:00 pm
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In his New York Times Op-Ed article yesterday, Paul Krugman agrees with President Obama and the so-called liberals in Congress that redistributing wealth is more important than policies designed to create more jobs. Like Obama, he wants to cut off the extension of the Bush tax cuts for “rich” single taxpayers with incomes at or above $200,000 a year and for married couples with incomes at or above $250,000 a year.

Krugman characterizes an across-the-board extension of the Bush tax cuts for all Americans as largely benefitting “the richest 120,000 people in the country.”

Without citing any rigorous empirical evidence at all to back up his position, Krugman dismisses out of hand the argument that small business owners, many of whom file individual returns, would be hurt by an arbitrary tax cut extension cut-off  at the $200,000 or $250,000 levels. Krugman asserts:

only a tiny fraction of small-business owners would receive any tax break at all. And how many small-business owners do you know making several million a year?

There may not be too many in this lousy economy making several million dollars a year to tax, but there are likely to be quite a number of small business owners making taxable income between $200,000 and $250,000 a year who may have to cut their payrolls or decide not to expand in order to meet their increased tax liabilities. Many of these businesses were started by entrepreneurs.

Krugman’s most glaring error is to disregard the effect of increasing the marginal tax rate on small business entrepreneurship in this country.

Entrepreneurs create jobs in at least two respects – for the person who moves successfully from unemployment to self-employment and for additional persons who may be hired by the new business as it expands. If Krugman disputes this, he may wish to review an empirical study entitled “An Empirical Assessment of the Contribution of Small Business Employment to U.S. State Economic Performance” in which the authors concluded that states with higher proportions of very small businesses have lower unemployment rates overall.

As for the effect of marginal tax rates on  entrepreneurial activity, the authors of a detailed 2006 empirical analysis  entitled “Federal Tax Policy and Small Business” (Donald Bruce from the Center for Business and Economic Research and Department of Economics at the University of Tennessee and Tami Gurley-Calvez from the U.S. Government Accountability Office) examined data  compiled from individual tax returns over a twelve year period. Acknowledging studies already showing that small businesses represent a disproportional share of taxable profits when compared to their share of total business receipts, they set out to examine more specifically the effects of tax rates on individual transitions into or out of some form of entrepreneurial activity.

Their bottom-line conclusion:

the effects of entrepreneurship tax rates are much larger than those for wage tax rates. This suggests that the recent policy of across-the-board tax cuts, which has resulted in equal-rate tax cuts on wage and entrepreneurship incomes, could increase rates of small business start-up and survival…

policies aimed at reducing the relative tax rates on entrepreneurs would likely lead to increases in entrepreneurial entry and better chances of survival.

Paul Krugman has honed his sweeping populist class warfare rhetoric under the guise of economic analysis into an art form. However, we are on to his sophistry at Newsrealblog and will continue to call him out on it.

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