Update 11/10/2012: The Bush tax cuts are part of the phenomena called the "fiscal cliff." They are set to expire at the end of 2012. If they do expire, income taxes will go up to Clinton-era rates, which are considerably higher than individuals are paying now. The proposal from the President is that they are kept in place for those making under $250,000. The proposal from the Republican House is that they are kept in place for those making over $250,000 as well. This will be negotiated as part of the "fiscal cliff" negotiations, but a big question is whether or not ending the Bush tax cuts will hurt small business.
In both 2001 and 2003, President Bush enacted a series of tax cuts. Those tax cuts are due to expire at the end of 2010. They were extended until the end of 2012. If they are not extended again by the President and Congress, on January 1, 2013, taxes will go back to pre-Bush levels.
Will Extending the Bush Tax Cuts Help Small Business?
One of the most common reasons that politicians want to extend the Bush tax cuts is their belief that extension of the Bush tax cuts will help small business. But will it? Under the Bush tax cuts, capital gains tax is 15%. If the Bush tax cuts expire, it will go back to 20%.
Other than that, the claim by politicians that the expiration of the Bush tax cuts would hurt small businesses may be misleading. In a recent study by the Tax Policy Center, it is not at all clear that expiration of the Bush tax cuts would hurt small businesses. Indeed, according to their research, expiration would probably not hurt most small business owners.
Here are the facts. Many small businesses report their income either on Schedule C (sole proprietors), Schedule E (S Corporations), and Schedule F (farms). Only about 2.5% of all the returns including those three schedules would be affected if the Bush tax cuts are allowed to expire. Given this information, extending the Bush tax cuts would miss the majority of small business owners and would, instead, target those who do not make most of their money from small business income.
Only about 3% of small businesses will be affected if the Bush tax cuts expire. The type of business owner who will be affected by the expiration of the top Bush tax brackets are doctors, lawyers, and those who own a lot of real estate, or chains of stores. The average small business owner simply does not make the kind of money that puts them in the highest tax brackets.
What Would be the Effect on the Deficit?
A problem with extending the Bush tax cuts is that they will also add to the government deficit. They are not necessarily the cause of the deficit, but they were not paid for when enacted. They will add to the deficit, but they are not the sole problem.
Should the Bush tax cuts be extended? The answer is not as certain as the politicians would have us believe.