Thursday, October 11, 2012

Romney's Small Business Tax Prediction Wrong

In the debate, Mitt Romney said increasing taxes on the wealthy (income above $250,000) would hurt small businesses because the wealthy are the "job creators."

First, if they're the "job creators" they need to be fired for not doing their "job" over the past four years. 

More important, however, is that Romney was wrong.  Romney said:

Well, President, you're — Mr. President, you're absolutely right, which is that with regards to 97 percent of the businesses are not — not taxed at the 35 percent tax rate, they're taxed at a lower rate. But those businesses that are in the last 3 percent of businesses happen to employ half — half — of all of the people who work in small business. Those are the businesses that employ one quarter [25%] of all the workers in America. And your plan is take their tax rate from 35 percent to 40 percent. (NPR)

Robb Mandelbaum writes in the New York Times:

First, there is the obvious error of transmission in his retelling — that these companies account for a quarter of the work force, when in fact the Census Bureau cohort included companies with up to 299 employees (not 250).

Romney got the numbers wrong.  But Mandelbaum continues:

...according to the N.F.I.B. [National Federation of Independent Businesses] survey, the share of the total work force that might be affected by the increase in tax rates is around 6 percent, not 25 percent.

So the 3% of businesses Romney refers to do not "employ one quarter [25%] of all the workers in America" but, according to the survey with the data Romney is relying on, employ 6% of all the workers in America.  Mandelbaum continues:

In 2007, according to the Census data, companies with 20 to 299 employees employed 55 percent of the total work force at companies with fewer than 500 workers, a common definition for a small business. But given the N.F.I.B. survey’s finding that only 22 percent of businesses in roughly that size range would actually face a tax increase, those businesses’ share of the small-business work force would be only about 12 percent.

So Romney said the 3% of small businesses affected by this tax "employ half — half — of all of the people who work in small business."  But, according to the Census data and N.F.I.B. survey, the 3% of small businesses affected by the tax employ 12% of all small business employees, not 50%, as Romney claimed.

Mandelbaum continues:

Mr. Romney’s larger point is that the 4 percent increase in taxes on small businesses making more than $250,000 a year will cause these profitable companies to cut jobs — 700,000 employees in all, he said.
Liberal economists see little, if any, effect from taxes on investment. Conservatives see a substantial effect, but even some conservative economists acknowledge that it is impossible to prove the connection using economic data given all of the other variables at work in the economy.

So the 700,000 jobs lost due to a 4% tax increase on those making more than $250,000 does not take into consideration the "variables at work in the economy".  Mandelbaum also points out:

The N.F.I.B. survey, conducted by Gallup in December 2007 and January 2008, interviewed only 154 businesses with 20 to 249 employees, which statisticians would consider a small sample. The businesses in the survey were randomly selected from Dun & Bradstreet lists.

Statistically speaking, the survey does not include enough businesses.

But, to make this more interesting, CNN Money gave an interesting scenario of what would have happened if Republicans in the Senate did not block the "Democrat-backed bill that would have extended tax cuts to small businesses".

$73 billion - Amount of the projected total increase in personal incomes if the Democrats' Small Business Jobs and Tax Relief Act had passed in the Senate.
$87 billion - Amount potentially added to the GDP.

So, let's say Democrats are a little liberal and their numbers are off by 50%.  Incomes would have increased by over $36 billion and the GDP would have added about $43 billion.  Who is really looking after small businesses and who is looking after the 1%?

No comments: