How are Small Businesses Affected by Changing Taxes on the Wealthy?

BY Paul Solman  March 8, 2012 at 11:17 AM EST

Small Business Owners
Kim Chauvin and her husband Dave, co-owners of the Mariah Jade Shrimp Company, prepare a small load of shrimp to be delivered to a client at their shrimp processing plant in Chauvin, La. This husband and wife team have been in the shrimping business all of their lives. Photo by Rod Lamkey Jr./AFP/Getty Images.

Paul Solman frequently answers questions from the NewsHour audience on business and economic news on his Making Sen$e page. Here is Thursday’s query:

Name: Dale

Question: I often hear politicians making the statement that raising the taxes on the rich will hurt small businesses. I must be missing something. It seems to me that if the government were to raise taxes on wealthy individuals and reduce taxes on businesses of all sizes, it would encourage businesses to invest and grow their businesses. The reason seems obvious. If I were a business person making a decision about what to do with the money generated by my business, I would see that if I invested the money made by the business in its growth, that would build more wealth for me than lining my personal pockets with it and losing half of it to taxes. Then, if the business grew, I would recoup my personal tax increase as my business increased in value. Am I missing something?

Making Sense


Paul Solman: No, you’re not. At least not according to the great Reuters reporter David Cay Johnston when we interviewed him recently. Johnston is himself a small businessman, though he didn’t talk about lowering taxes on business. He simply pointed out that if his personal taxes were raised, he’d work harder to maintain his standard of living. His observation resonated with a lot of viewers. On the other hand, Nobel laureate economist Gary Becker assured me, back in 1996 I think it was, that if the top tax were raised on him, he would work less — would turn down a speech that he might have otherwise given, for example. I suppose the bottom line, then, is that different folks would have different reactions to a tax rate hike. It might depend on how much they like or dislike making any extra effort, given their opportunities.

As to your reasoning, Dale, the traditional rebuttal is that while you might react to higher taxes by plowing more of your business income back into the company, your investors might not. This is the objection I often hear from business owners: higher taxes will send their investors scurrying for more profitable after-tax returns by seeking out opportunities in lower-tax climes or tax-exempt investments.

In fact, I heard this from a money manager just the other day. He also said he would work less if taxed more. But as I told him, how does he know what he would do? And that, frankly, I didn’t believe him. If he already earns enough, has enough, why wouldn’t he cut back now and enjoy more leisure? A more plausible explanation of his opposition to higher taxes: he’d wind up with less. And that “less” really matters to him.

This entry is cross-posted on the Making Sen$e page, where correspondent Paul Solman answers your economic and business questions