Small Matters: Geithner indulges in magical thinking on taxes

Treasury Secretary Timothy Geithner talking about the debt crisis on CBS's "Face the Nation" last week.
Treasury Secretary Timothy Geithner talking about the debt crisis on CBS's "Face the Nation" last week. (CHRIS USHER / CBS News)
Posted: July 18, 2011

In recent congressional testimony, Treasury Secretary Timothy Geithner stated that small-business owners need to pay more taxes to support government spending. The alternative, he said, was reduced spending for important things like education.

This is typical of a politician's response to budget crises, at the local, state, and federal level. Pain is inflicted on the voters to remind them that government needs more money. Patronage jobs, spending on projects that are political favors, improved efficiency in departments headed by friends of the mayor/governor/president are untouched. Instead, libraries, fire stations and police get the cuts, or in the case of Geithner's comments, education or nutrition in the schools.

There is no end to the good deeds Congress can do with your money, although rarely efficiently. Waste seems inherent in government spending since administrators have little incentive to be efficient. Private firms, on the other hand, must make sure they are efficient or they go out of business.

Geithner said that raising taxes on those earning $250,000 or more would affect only 3 percent of small businesses. This statistic is very misleading, using as the denominator in their fraction the number of people with any business income reported on a Schedule C tax form (like eBay sales). That's about 30 million people. However, only six million firms in the United States employ people beyond the owner, and those firms matter for job creation.

The percentage of small-business employers affected by a higher tax is really five times larger than Geithner asserts. Most small businesses are not corporations, they pay taxes based in the individual tax schedules.

This is at the heart of the debate between President Obama and members of Congress over spending cuts and higher taxes for the wealthy. Geithner clearly values record-high (25 percent of gross domestic product) government spending more highly than private spending, asserting that the "modest change in revenue" (a trillion dollars is to be collected by the proposed tax increase) would be less damaging to the economy than the spending cuts that would have to be made if revenues were not increased.

In simple terms, Geithner believes the government can spend a dollar more wisely and efficiently than you or I. There must be some magic involved in that assertion, because a private dollar spent adds at least as much to GDP as a government dollar spent.

Geithner's view was enhanced by his assertion that "to finance those tax benefits for the top 2 percent" would require the government to borrow an extra trillion dollars. That supposes taxpayers are somehow getting a "benefit" by having tax rates at the present level - a level that is lower than where they should be. Only the administration knows what that correct-but-higher level should be.

The tax rates haven't changed for a decade, so it is not clear on what those "tax benefits" are based.

The current tax law generated tax revenue equal to 18.5 percent of GDP in 2007, so we can't blame the tax code for the current deficit. The top 5 percent of the taxpayers already pay about 60 percent of all federal income taxes collected.

We do need tax reform, but that doesn't mean that tax rates have to be raised.

Apparently, government spending at 25 percent of our GDP is a proper level, and must be supported by taxpayers. It hasn't been that high since WWII. These are political decisions that we make at election time, and that time is upon us.

The vitality of the U.S. economy, its job and wealth creation, come from the private sector, not government. Government can get in the way, through regulations that provide little benefit to citizens.

Twenty-five percent of the 350,000 members of the National Federation of Independent Business reported "poor sales" as their number one business problem. Same response each month of this year, and among the highest readings in the 37-year history of the organization's surveys. But 35 percent cite taxes and useless regulations as their top business problem, more troublesome than sales losses in the Great Recession.

Remember, firms do not pay taxes, they simply collect them for the government - because firms that don't make money after paying taxes go out of business, destroying jobs.

Governments rarely go out of business. They just reach deeper into the taxpayer's wallet.


William Dunkelberg is a professor of economics at Temple University and a nationally renowned expert on small business. Contact him at dunk@temple.edu.

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