Not Extending Bush Tax Cuts Will Affect All Small Businesses

Some will question me writing about tax policy, but the undeniable truth is that tax policy is enormously important to businesses of all sizes, including small businesses. Tax policy also affects job creation, because anytime businesses have to pay more and retain less that increases operating costs, which necessarily leaves less to reinvest in the business. This affects all sorts of things, including but not limited to lay-offs, a failure to create jobs and the investment in the creation of innovation. History shows us that when business is bad and revenues decrease businesses of all sizes typically cut back on activities necessary to innovate. When you look for less you find less, so this can and does negatively impact innovation. Innovation, job creation and a variety of matters important to small businesses are common topics here on  With this backdrop I leap to take on the un-reported story relating to the fact that expiration of the Bush tax cuts will impact virtually all small businesses, not just the 3% of small businesses continually, and inaccurately, stated by the Democrats.

President Obama and his Democrat allies like to say that allowing the Bush tax cuts to expire will not affect the overwhelming number of small businesses in America because some 97% of small business owners make less than $250,000 per year. This is true in one literal sense, but absolutely false in reality. If you take the argument at face value, it will not raise taxes on those who receive W2 wages that are less than $250,000, but that does not mean that small business owners making less than $250,000 will not see a raise in taxes. Most small business owners, or at least those who have an accountant, do not take all their monies in the form of W2 wages because their tax rate would be much higher. Rather, many, if not most, small businesses, take a meaningful part of their monies in the form of qualified dividends, which entitles treatment of those monies at a more favorable tax rate when they file their taxes on their own, with the use of tax software or through their accountant.

Upon the expiration of the Bush tax cuts, among increases in the tax rate for all tax brackets, the dividends tax rate will increase. So even if Congress and the White House extend the Bush tax cuts for all but the top earning Americans, virtually all small business owners, regardless of their tax bracket, will see an increase in their effective tax rate as a result in the increased tax rate for dividends. This will be horrible for small businesses, many of whom as either Limited Liability Companies or S Corporations enjoy no corporate taxation and see all of their earnings passed on to them individually either in the form of W2 wages or qualified dividends.

The IRS requires that small business owners take a “reasonable salary.” The remaining profits are then distributed as a qualified dividend, which means they are taxed at a lower dividend tax rate rather than the W2 tax rate, which can easily be more than double the dividend tax rate. So when the Democrats failed to extend the Bush tax cuts and claim to want to only extend the tax cuts for families making less than $250,000 for individuals making less than $200,000, they are going to increase the real taxes paid by virtually all small businesses. Without an extension of the Bush tax cuts across the board the overwhelming majority of small business owners to pay much higher taxes, including the top 3% of small businesses who account for 50% of the business revenue and numerous jobs, some of which will undoubtedly be at risk with increased taxes; not to mention the jobs that won’t be created as a result of increased overhead cased by more taxes.

The IRS has never gone after anyone who takes any salary, no matter how low. The IRS only goes after those who take $0 in salary and 100% in qualified dividends. Additionally, the term “reasonable salary” is not clearly defined and is really based on the circumstances. In fact, there are so many people who own businesses that take 100% in qualified dividends that the IRS doesn’t go after those taking any amount of W2 salary. The IRS almost certainly doesn’t want to have the term “reasonable salary” defined because that could potentially remove the fear and define an amount that is reasonable, thereby giving small business owners the ability to know exactly what they can get away with, possibly allowing many to pay themselves less in W2 salary than they are currently, which would have a negative impact on revenues for the federal government.

As I see it, the net effect of not extending the Bush tax cuts across the board is that some who work for small businesses are going to lose their jobs. Small business owners have expenses themselves and need to make a certain amount of money to survive in their own lives. I have never met a small business owner who lays themselves off, so if business is not growing and there is increased cost to the bottom line that will result in cutting back somewhere, whether it is in the form of lay-offs or decreased hours. At the very least small businesses will not be able to create the jobs they otherwise should.

Policies that make job creation more difficult and investment in innovation more unlikely are reckless, particularly at a time when our economy is so hurting. That is why the Bush tax cuts should be extended across the board at least temporarily.

There will be some who say we cannot afford it because to keep the Bush tax cuts that will cost $4 trillion over the next 10 years. Everyone already agrees that the tax cuts will be kept for all those not in the top two tax brackets, which will cost $3 trillion. So we are not talking about $4 trillion, we are talking about $1 trillion over 10 years if we make the Bush tax cuts permanent, which is exactly what should be done to give businesses and individuals the certainty that is necessary to unleash the economy and let businesses and individuals have certainty to plan their affairs. So enough with the misleading “where are you going to get $4 trillion to pay for the tax cuts,” as Chris Wallace kept asking today on Fox News Sunday. The bridge has already been crossed with respect to $3 trillion, so when the issue of the top two tax brackets, capital gains and dividends taxes are raised the question is where will you get $1 trillion over 10 years.

It is crazy to require the offsetting of tax cuts. Requiring offsetting of tax cuts treats cutting taxes as if it is a zero sum game, which history shows us it is not. When taxes are cut the economy expands and revenues to the federal government rise.

Those who choose to blame the Bush tax cuts for the ballooning of the national debt conveniently do two things, they focus on the Bush first term and ignore the fact that the terrorist attacks on 9/11 dramatically and negatively impacted our economy. It is intellectually dishonest to ignore the reality that during the second Bush term the net incoming monies to the federal government skyrocketed all while we were still having the benefit of the Bush tax cuts, which as a matter of fact and reality lead to the federal government taking in more money.

For example, here are the revenue numbers for the United States federal government from 2000 to 2009:

  • In 2000 the federal government took in $2.025 trillion
  • In 2001 the federal government took in $1.991 trillion
  • In 2002 the federal government took in $1.853 trillion
  • In 2003 the federal government took in $1.782 trillion
  • In 2004 the federal government took in $1.880 trillion
  • In 2005 the federal government took in $2.153 trillion
  • In 2006 the federal government took in $2.406 trillion
  • In 2007 the federal government took in $2.568 trillion
  • In 2008 the federal government took in $2.524 trillion
  • In 2009 the federal government took in $2.105 trillion

Those who say that we cannot see revenue growth during a time when taxes are cut need to explain the revenue realities from 2006-2008, at a time when we had the full benefit of the two Bush tax cuts, which are lambasted regularly in liberal circles as irresponsible.  Elevated federal revenues are particularly curious given the fact that the deepest part of the recession was during the 2006-2008 time frame, which is when federal revenues were quite high.

The reality is that the Bush tax cuts only seem to have caused significant backward movement in revenues only AFTER President Obama took Office. That to me seems to be proof that the Bush tax cuts are not to blame and the uncertainty caused by the Democratic agenda, from uncertainty about the costs of health care to uncertainty about cap and trade energy taxes to uncertainty about what tax rates will be come January 1, 2011.  This uncertainty might as well be an anti-business agenda, and the revenue numbers seem to suggest that it is this anti-business approach to governing that is to blame.  So why when experts say the recession was over in 2009 are revenues significantly lower?

The Bush tax cuts are not to blame for the ballooning national debt.  Failure to extend the Bush tax cuts across the board will negatively impact individuals and virtually all small businesses, which is a step in the wrong direction.  The arguments and false choices presented by the Democrats ignore the positive impact tax cuts have on expanding the economy.  As even elementary school children understand, it is better to have a smaller piece of a larger pie than a larger piece of a small pie.  Why so many in Washington, DC can’t understand that is curious indeed.


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19 comments so far.

  • [Avatar for IANAE]
    October 22, 2010 02:10 pm

    For those small businesses that are not in the top 3%, the tax burden will be substantially less than an additional 25K or so, and certainly not enoguh to warrant laying off a needed employee.

    If your employee does work you don’t have time to do yourself, or has essential skills you don’t have yourself, or earns/saves more money than he costs, you’re not going to lay him off no matter what. If not, you probably should have laid him off anyway.

    We’re really talking about someone who takes home a quarter million a year being slightly more out of pocket, aren’t we? I’m sure that (1) he can handle it, and (2) he’s still better off keeping the remainder of his quarter million than closing up shop and living on imitation gruel. No reasonable rate of tax on any type of income turns a profit into a loss. No business that nets a quarter million a year is going to shut down or lay people off because of the dividend tax rate, either. It simply moves money from people who have it (high earners) to people who spend it (the government, and poor people), which is exactly the rationale all the rich people give why they deserve huge tax cuts.

  • [Avatar for TINLA IANYL]
    October 21, 2010 02:40 pm


    I think you bring up a good point about government wasteful spending. I’ve been led to believe that it doesn’t really matter whether the government simply gives the money away as opposed to spending it on something that is needed. Just getting it into the hands of people living paycheck to paycheck, who WILL spend the money, is effective in and of itself. It helps to break free some of that wealth, instead of further shoring up the stagnated situation in which 5% of the people have 95% of the wealth, which is where we have found ourselves for a very long time.

    However, I’m no financial expert. Maybe putting the money in the hands of the have nots would simply cause inflation that would cancel out any economic benefit. Economics is all very confusing and I’m not sure anyone really understands it. Plus, I don’t really know what would happen if we tried to access wealth that only exists on paper, as money lent several times over and over again. I’ve heard so many conflicting theories from so many different experts, none of which agree, that I don’t know what to think.

    FTR though, I didn’t mean that only 3% of small businesses would be affected. Rather, I think that most small business owneres have incomes that puts them in the top 3% or better among all Americans. For those small businesses that are not in the top 3%, the tax burden will be substantially less than an additional 25K or so, and certainly not enoguh to warrant laying off a needed employee.

  • [Avatar for Gene Quinn]
    Gene Quinn
    October 21, 2010 01:27 pm

    Hey there POP! How are you doing! Good to have you back.

    I agree with you largely. I find myself far more sympathetic to the conservative agenda though. Having said that, it makes absolutely no sense to give tax breaks to companies that move jobs overseas.

    On top of that, our government really isn’t interested in keeping jobs in the US. This is both a D and a R problem. There are many things outsourced in direct and open violation of US export regulations and neither party seems to care. If the US export regulations were enforced there were be far less outsourcing in the high tech sector and many jobs created in the US.

    So… while I am far more conservative in my views it has always been my opinion that if conservatives and liberals sat down to fix problems without worrying about campaign contributions we could achieve real solutions for the problems we face.


  • [Avatar for Gene Quinn]
    Gene Quinn
    October 21, 2010 01:20 pm


    I think what you are missing is that it won’t be the top 3%. 100% of small businesses will see a tax increase because at least a portion, sometimes a large portion, of what the small business owner takes home comes in the form of qualified dividends. So when the dividend tax rises all small business owners will see an increase in taxes, whether they make $250K or whether they make much less.

    We will have to agree to disagree regarding spending. The federal government simply throws money away, so the spending will not in any way really impact the economy. For example, take a look at this:

    Stimulus checks are sent to dead people and $111 million was spent in order to create 55 jobs. The waste in the stimulus has been fairly well documented, for example see:

    I think it is outrageous to spend over $70,000 of stimulus money on a study relating to the effect of cocaine on monkeys.

    So I trust the people and business to spend money on what they need, not government to tell us what we need and then waste the money. As for hording, the hording is going on as a result of policies that scare the public. Not knowing what your tax rate will be come January 1, 2011 is causing many to be very cautious and saving to make sure they can afford the tax bill. For businesses they are concerned about that, but also concerned about the rising health care costs, which wasn’t supposed to happen, and a financial regulation bill that has just made it harder for small businesses to get the credit they need to continue operations.


  • [Avatar for TINLA IANYL]
    October 21, 2010 12:20 pm

    I’m not sure I completely understand the argument that higher taxes on qualified dividends will result in small business owners laying off employees. Basically, if I understand correclty, a small busioness owner having an income of about 250K would wind up having a decreases in invome of about 25K. Does that sound about right? But if they lay off an employee to make up for that loss, then they have to fill that labor gap with their own labor. I would think it more likely that they would just tighten their belts a little bit, and keep the employee. You might argue thart less spending from that small business owner would then impact the economy, but the government is just going to spend the money instead. If anythything, that money is now assured to be spent, rather than horded. So I don’t get why it’s so bad for the top 3% to be able to horde less income. Maybe I’m missing something. Can you fill in the blanks?

  • [Avatar for Andrew Cole]
    Andrew Cole
    October 21, 2010 09:17 am


    Still holding on the Laffer curve eh? 😉

    Actually, I have no problems with keeping tax rates as low as possible for small businesses, but what I would like to see is a spike in taxes for large corporations, especially those that send jobs overseas. I agree with Obama when he says we shouldn’t be rewarding those who create jobs overseas.

    I’d like to see a “Laffer” type curve for the size of corporations that shows their total value to the United States, not just in taxes but also the welfare of the citizens. Once a corporation reaches a certain mass they spend all their effort trying to cut fat, which usually means lower wages, layoffs, and moving jobs overseas.

    I realize that globalization doesn’t make these issues so easy, and I’m no advocate for protectionism. I can see the arguments on both sides of this debate, but right now I’m more sympathetic to the liberal agenda than the conservative one.

    That is just my opinion though. I haven’t been around here in a while, lol.

  • [Avatar for Gene Quinn]
    Gene Quinn
    October 19, 2010 02:23 am


    Fair enough. Sorry if I jumped to conclusions. I know that it is not what I typically write about, but I thought it tangentially related enough given the jobs and small business connection (frequent themes).



  • [Avatar for Gene Quinn]
    Gene Quinn
    October 19, 2010 02:21 am


    No bet. I really can’t predict what will happen any more. I have never seen so many politicians who are tone def. I agree the game changes on November 2, but what will happen in a lame duck? Who knows? The Members of the House had to know that voting for health care, which was the cherry on top of the Sundae, would lead to many of them throwing their political careers away, yet they did it.

    Would Obama veto a Republican bill that extends all tax cuts in January 2011? He might just do that. Of course, the news that he is studying Clinton is encouraging and suggests he will moderate. On the other hand, he thinks his problem is that he “sounded” like a tax and spend liberal, not that his policies are tax and spend, just that they sounded that way to those who are scared and not thinking clearly. Amazingly arrogant if you ask me.

    In any event, I don’t know what to expect any more, but I think you might be right.


  • [Avatar for Gene Quinn]
    Gene Quinn
    October 19, 2010 02:16 am


    Oh I have proven that the Bush tax cuts increased revenues. All you have to do is read the article, this time trying to put your political bias aside.

    Since YOU want to compare apples and apples, that would seem to be an invitation to be intellectually honest. That being the case I invite YOU to be intellectually honest.

    First, of course a 0% tax rate would result in 0 revenues. You see, when you multiply 0 by any number the result is 0! So please, if you are going to try and be intellectually honest don’t use “the sky is up and the ground is down, therefore I am right” arguments. That is absurd.

    Second, you and everyone else seem to forget that due to the dot-com explosion, which Clinton really had nothing to do with but have the good fortune to be in the White House for, the economy expanded extraordinarily rapid. So when you have higher tax rates and a rapidly expanding economy the people are still year after year having more money in their pocket despite higher taxes. On the contrary, when you raise taxes, like President Obama and the Democrats are poised to do, when the economy is struggling then the people will have less money in their pockets. It is really a very simple concept, I do hope you can follow along.


  • [Avatar for Anthony]
    October 18, 2010 08:20 pm

    First lets compare apples to apples and account for inflation. On a constant dollar basis (2005)( revenue did not increase as you assert in 2008 but instead decreased from a max in 2007 of 2,414 to 2,288.5 in 2008.

    It took the Bush tax cuts of 2001/2003 to go from a low of 1901.0 in 2003, 4 years to reach a maximum of 2,414, a total percent increase of 20%.

    Now lets compare a same 4 year period under the heinous tax regime of Clinton after the 1993 tax increase, 1617.7 in 1994 to 2040 in 1998, or a 26% increase.

    While decreasing tax rate may cause ultimately cause an increase in revenue it certainly doesn’t for all cases. Take for instance a 0% tax rate. Even the most ardent supporter of the Laffer curve would agree that a 0% tax rate would result in 0 revenues (on the flip side 100% tax would generate little to no revenue as no one would be motivated to work). Therefore there is some tax rate in between those two rates that maximizes federal income.

    Based on the comparison of the Clinton years at the higher tax rate compared to the same time period of the Bush years you certainly haven’t proven that the Bush tax rate is closer to maximizing revenue than the higher Clinton rates.

  • [Avatar for Yet Another Examiner]
    Yet Another Examiner
    October 18, 2010 08:01 pm

    “The reality is that the Bush tax cuts only seem to have caused significant backward movement in revenues only AFTER President Obama took Office. That to me seems to be proof that the Bush tax cuts are not to blame and the uncertainty caused by the Democratic agenda, ”

    I certainly can’t think of anything else that occurred around 2008 that might have caused a slowdown in revenue.

  • [Avatar for John Rogitz]
    John Rogitz
    October 18, 2010 08:00 pm

    Gene, the game changes in two weeks. If the House flips as expected, the lame ducks can do one of two things: extend all current tax rates in an effort to take a little credit for not being totally tone deaf, or do nothing – and let the new (Republican) Congress in January take all the credit. I do not think the third option – allowing some but not all rates to rise – would make it out of the House, since too many Dems are running scared now and the survivors, if not the dead pols walking, won’t grow any more courageous after the tidal wave.

    Given the surprisingly tin political ears and commendable ideological purity of Nancy and Barry, I give the nod to option #2, pretty high too: 7/5.


  • [Avatar for Alex Petersen]
    Alex Petersen
    October 18, 2010 03:09 pm

    Gene, great post! Until we have lay people that are willing to explain the truth about these issues, the general population is just not going to get it! Thanks for speaking about this important issue. Gene for Congress!

  • [Avatar for BIll Hollimon]
    BIll Hollimon
    October 18, 2010 02:34 pm


    I appreciate your work in writing this blog – I usually find it to be a reasonably good resource for IP related issues. The intent of my comment was, in fact, to question you about writing about tax policy. I am neither offended by your piece, nor do I have an “agenda.” In my opinion, the issues you discuss are extremely complicated and it is therefore most difficult to distinguish correlation from causation. I simply disagree with some of your conclusions.

    My initial comment was not directed to the factual accuracy of your piece, and I am sure that you can support your position. However, I will note that the NBER has the recent recession running from 12/2007 to 6/2009 ( which may, or may not, be consistent with your post.

  • [Avatar for Gene Quinn]
    Gene Quinn
    October 18, 2010 12:25 pm


    Thanks for the comments and for sending the link around. Thanks also for reading.


  • [Avatar for Gene Quinn]
    Gene Quinn
    October 18, 2010 12:24 pm


    Obviously you didn’t read what I wrote. This is apparent for at least two reasons. First, everything I said is 100% correct, so if you have a problem with what I wrote you really should ask yourself what your agenda is and why the hard facts are so offensive to you. Second, I never said I should stick to IP. What I said was that there would be people like you who would question me writing about the topic, so I was again correct there, making absolutely everything I said accurate!

    Really Bill, if the truth offends you there is no need for you to read If my writing about extremely important issues for small businesses is offensive then I suggest that is a YOU problem, not a ME problem.


  • [Avatar for Logic Fallacy Detector]
    Logic Fallacy Detector
    October 18, 2010 10:54 am

    “The reality is that the Bush tax cuts only seem to have caused significant backward movement in revenues only AFTER President Obama took Office. That to me seems to be proof that the Bush tax cuts are not to blame and the uncertainty caused by the Democratic agenda”

    Just because the revenues had “backward movement” when Obama took office doesn’t mean this caused the backward movements. You’re confusing correlation with causation.

  • [Avatar for BIll Hollimon]
    BIll Hollimon
    October 18, 2010 07:51 am

    Gene – you are correct – you should stick to IP.

  • [Avatar for Daniel Stoica]
    Daniel Stoica
    October 17, 2010 11:07 pm

    Awesome Post!

    Thank You very much Gene for a well thought out and expressed post on the tax cuts extension.

    Truly appreciate and respect professionals “outside” the tax community voicing the potential impact to all small businesses.

    Awesome site BTW!

    Just this past week expressed the need for Patent Protection to a client. 🙂