Opinion - Bush economic plan includes small business benefits

By Raymond J. Keating

chief economist

Small Business Survival Committee

WASHINGTON, D.C. -- At the Economic Club of Chicago on Jan. 7, President George W. Bush unveiled a new set of policy proposals meant to give the economy a boost. Clearly, this President Bush understands something his father didn't - tax increases hurt the economy, while tax cuts serve the economy well.

While much attention has been focused on the president's idea for eliminating taxes paid on dividends by individuals, the big plus for the entrepreneurial sector of the economy is the proposed acceleration of reductions in personal income tax rates currently scheduled to go into effect over the next few years.

Under the Bush tax cut passed in 2001, the top income tax rate for individuals declined from 39.6 percent to 39.1 percent in 2001 and then to 38.6 percent for 2002 and 2003. The rate is scheduled to fall to 37.6 percent in 2004 and further to 35 percent in 2006. Bush's new proposal would make the rate cuts in 2004 and 2006 retroactive to Jan. 1, 2003.

One may ask: Why is this important for entrepreneurs and small businesses? First, income taxes hurt the economy by diminishing incentives for working, saving, investing and risk taking, all which drive economic growth. Obviously, cutting income tax rates will boost pro-growth incentives.

Second, most people fail to realize that roughly 90 percent of U.S. businesses do not pay corporate income taxes, but instead pay personal income taxes because they are sole proprietorship, partnership or S-Corporations. So, personal income tax relief directly impacts the business bottom line.

Other measures in the Bush plan will be beneficial as well. For example, expanding the ability of small businesses to expense capital spending - from $25,000 to $75,000, and indexing it for inflation - will enhance incentives for investment. Also, the president again called for making the 2001 tax cut package - including the income tax rate cuts and the elimination of the death tax - permanent, as it is currently set to expire as of 2011. Removing this tax uncertainty is critical for all taxpayers and the economy.

The dividend tax proposal will not have a direct impact on the entrepreneurial sector of the economy, but any proposal to eliminate an entire layer of taxation deserves support. And the big plus for eliminating taxes on dividends is that it will remove some tax distortions and improve the overall efficiency of capital markets. Also, resources generally will be shifted from government back to the investor class, which is good for the economy. The president also should support eliminating another layer of taxation, i.e., capital gains taxes. Eliminating capital gains taxes would enhance pro-growth incentives across the board, thereby boosting investment, entrepreneurship, businesses of all types and sizes, and the economy in general.

On the negative side, the president's call to create "Personal Re-employment Accounts" - whereby, in addition to unemployment benefits, some unemployed workers would get up to $3,000 for expenses related to seeking employment - would be a costly program that would be set to expand in the future. Meanwhile, it would accomplish nothing of a positive nature for the economy.

In the end, though, barring the increased government spending initiatives, President Bush has put forth a solid proposal that should help the economy. Congress now would do well to cut down on the spending side of the proposal, while enhancing the growth aspects. How about killing that anti-entrepreneur, anti-growth capital gains tax?