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September 10, 2012 02:00 AM

Study: Tax hikes will stymie small biz growth

Miles Moore
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    The “fiscal cliff” of allowing the Bush-era tax cuts to sunset at year-end would be a real cliff for small business, according to a new study by accounting firm Ernst & Young L.L.P.

    If the tax cuts for wages of more than $250,000 are allowed to end this year as President Obama has proposed, the two top tax rates will rise to 36 from 33 percent and to 39.6 from 35 percent, according to the study by Robert Carroll and Gerald Prante of Ernst & Young.

    Allowing the tax hikes to go through, Messrs. Carroll and Prante concluded, would cause the U.S. economy over time to shrink 1.3 percent and cost the U.S. roughly 710,000 jobs, because of the dampening effect of the higher taxes on hiring and investment.

    Mr. Carroll presented the study's findings earlier this summer at a press conference at the headquarters of the National Federation of Independent Business (NFIB). The NFIB funded the study, along with the U.S. Chamber of Commerce, the S Corporation Association and the Independent Community Bankers of America.

    If the two top tax rates are allowed to increase, that would affect 72 percent of all S corporation income, 61 percent of all partnership income and 13 percent of all sole proprietorship income, Ernst & Young and the NFIB said.

    At-risk taxpayers would include those with single tax returns of more than $200,000 in adjusted gross income and joint returns with more than $250,000, they said.

    In addition to the Ernst & Young data, “the Congressional joint Committee on Taxation recently published research that estimates around 53 percent of business income would be impacted allowing tax relief to expire on the top two individual brackets, impacting an estimated 940,000 who earn business income,” the NFIB said.

    Also appearing at the press conference was Rep. Kevin Brady, R-Texas, a high-ranking member of the House Ways & Means Committee, who promised that House Republicans would seek to make the tax cuts permanent and create comprehensive tax reform.

    “We will lower the tax rate for families and job creators,” Rep. Brady said.

    The release of the Ernst & Young study coincided with testimony by Federal Reserve Chairman Ben Bernanke before the Senate Banking Committee. In his speech, Mr. Bernanke warned that the “fiscal cliff” of higher taxes and spending cuts would cut job growth next year by about 1.25 million jobs if allowed to take place as scheduled.

    “The most effective way that the Congress could help to support the economy right now would be to work to address the nation's fiscal challenges in a way that takes into account both the need for long-run sustainability and the fragility of the recovery,” Mr. Bernanke said.

    “Doing so earlier rather than later would help reduce uncertainty and boost household and business confidence.”

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