I have worked for small businesses since the start of my career, and before that in college. And I have noticed a glaring loophole in Romney's argument that cutting income tax rates on businesses will spur investment and hiring:
Businesses are not taxed on all of their revenue. The income tax rate on business is only on their profits. In other words, a business is only taxed on an investment if it is already making money off the investment.
Under no circumstances will an increase in the rate of that tax make what would have been a profitable investment turn into an unprofitable one, because the tax doesn't come into play unless the investment is profitable in the first place.
If a business has profitable investment opportunities for the capital it holds, it will make them regardless. Whether the tax rate on that profit is 35 percent or 40 percent makes no difference in the investment decision.
The only way a cut in the tax rate helps business is that it allows them to keep a higher share of their profits, which means that they will have more capital later on. That would be a good argument for Romney if having more capital was the same as investing and hiring more. But as we have learned, it is not. We know that big US companies, for instance, are sitting on $1 trillion of cash, and another $4 trillion cash overseas, according to the Federal Flow of Funds Report. But they're not investing it.
What Romney is selling is another trickle-down bill of goods.
If we want to help small business, if we want to spur investment and hiring, the question should not be "How can business keep more of their profits?" but "How can we make it so that businesses see more profitable investment opportunities?"
In other words, what makes an investment profitable? That's the question businesspeople ask themselves, so that's the question policymakers should be asking as well.
Simple- an investment is profitable if it brings in more money through revenues than it costs the business in operating costs. In other words-- if I hire a salesperson to travel the country selling my goods, if I hire an assembly line worker to build my goods, if I hire this office worker to help me keep my books-- will the additional money coming into my business because I hired this person outweigh the salary and equipment I must provide them?
The answer: the Customers.
The company's customers buy the company's products, which creates the need for the employees to produce, sell, and service those products. If those customers go broke, the demand for the company's products will collapse. And the jobs will disappear, regardless of what the entrepreneur does.
If those customers -- the broad American middle class, the 99 percent -- are making money, and feeling secure, and getting the help they need, then they will have money to spend, the business will make money, and the business will invest and hire, even in the face of slightly higher taxes.
THAT is the issue. So Romney's 20 percent tax cut on medium-sized business? That money would be better used to shore up programs like Medicare, Social Security, or lower the cost of student loans-- programs that help the broad middle class.
And the ironic thing? Romney plans to pay for his tax cuts by eliminating or capping deductions. Yet deductions are precisely what allow businesses to write off the costs of doing business-- like transportation for that salesperson, equipment for that factory, desk space for that office worker. Without those deductions many projects and potential employees that once looked like profitable investments would no longer be worthwhile, and the effect would be less hiring, less investment.
Romney would kill small business if he's serious about his deduction caps (which don't come close to paying for his tax cuts anyway). It's critical that this message gets out there.