Drilling Down: Jared Bernstein Says Small Businesses Are NOT Overtaxed This week's Dashboard roundup of small-business news includes a link to a blog post by Jared Bernstein, the former chief economist to Vice President Joe Biden who is now a senior fellow at a Washington research group, the Center on Budget and Policy Priorities. Mr. Bernstein's post argues that Americans are not as overtaxed as some may think. We decided to follow up with Mr. Bernstein to ask him about small businesses and taxes. A condensed version of the conversation follows. Many small business owners - particularly those making more than $250,000 per year - feel that increasing their taxes will take away cash that they can use to invest, hire people and grow their businesses. Do you agree? Of course it's often a burden on a business - or a household, or a dog or a cat - to increase their tax payments. And smaller businesses have less insulation - typically less cash reserves, less access to credit markets or export markets - from such increases. But there are two key issues that are overlooked. First, remember, it's only the income above the $250,000 threshold that's facing a higher tax rate. If your business income - and we're mostly talking pass-throughs here - is $255,000, it's not that whole sum that faces the higher rate, it's the $5,000 above $250,000. So if the top rate goes from 35 percent to about 40 percent, which is what's on the table, that's $250 in new taxes. Second, as my blog post emphasized, in historical terms, households and businesses are paying less in taxes than they have in decades. I'm sure it doesn't feel that way - this remains a tough economy. And I'm sure there are exceptions. But the data are very clear on this point. Finally, let's not forget that we're talking about less than 3 percent of small businesses here, so I'm not sure about your framing of the question: "many small businesses." Do you believe that government incentives to small businesses in the form of rebates and tax credits help create jobs? As an economist, I try to answer such questions by looking at the research, but there's surprisingly little research on this question. What there is I'd have to say isn't hugely convincing. I'm quite certain that the truth is this: If you're running a business and you need to hire another worker to meet increased demand for what it is you're producing - if not hiring that worker means you'll leave money on the table - than hire him or her you will. I've worked for small businesses for most of my career and that's the way we've always treated hiring. Obviously, you never ignore your tax liabilities. But in the real world, they're not nearly as determinative as the D.C. debate would lead you to believe. Your analysis in your blog does not take into account local, state, sales and other taxes, fees and duties that small businesses are paying today. Do you think factoring in these additional costs would affect your conclusion? Good question, and I'm actually about to put up a new post about that. The short answer is no - because I don't believe the non-federal taxes have increased to offset the decline in the federal taxes. That's why so many states have been struggling with their budgets for so many years now. Do you believe that higher taxes will help reduce our national debt? And should small-business owners care? Just like lowering taxes is very clearly implicated in increasing deficits and debt. And yes, spending less has to be part of the solution too, but we've actually already taken such steps with over $2 trillion in spending cuts on the books - though, as you might have guessed, Congress is trying to unravel them before they even take place. House Republicans, for example, have voted to reverse the defense cuts. Business owners should care for the same reason anyone should care - small-business owners are people, too! - and then a few other reasons. We can't keep up our national public infrastructure on the historically low levels of revenue we're collecting, and that's bad for business productivity and customer access. I'd include public education as a key public good here, and businesses benefit a great deal from a better-educated work force. Even though tax rates are, as you explain, at a historical low, do you believe that raising taxes will inhibit our country's economic growth? Given the magnitude of increases we're contemplating, definitely not. The research is quite clear on this point. Just think back to the Clinton years, since that's the tax regime I'd like to see us return to. Those were much stronger growth years for G.D.P., jobs, business formation, incomes and wages than the George W. Bush years, though taxes were a lot lower in the latter case. Do you think that a president's economic policies will affect my little business, or are there greater economic events that overshadow what any president can do? Basically, I think we have this question pretty much backwards, and I think I know why. The best thing the president and congress can do for small businesses right now is to provide them with economically healthier customers, and that means more temporary jobs programs, at least until the private sector is firmly back up off the mat - ideas like state fiscal relief and infrastructure repairs.