Both parties have embraced the myth that tax cuts stimulate business growth, despite the obvious evidence to the contrary with respect to small businesses and, in so doing, they have embraced a pernicious falsehood.
First, let's redefine small business.
The SBA defines a small business as an enterprise that has anywhere from 100 to 1500 employees, with annual receipts ranging from $500,000 to $21.5 million.
This definition is very different from the colloquial definition which is more closely aligned with the "mom and pop" concept of small businesses ranging from the small grocery store to the sole practitioner in medicine, dentistry, law and accounting - the four professions with which most people come into contact on a regular basis. This is what the average person thinks of with respect to small business.
We can easily and accurately, then, redefine a small business as anyone who operates as a sole proprietorship or a Subchapter S corporation, as opposed to a limited partnership or a Subchapter C corporation, because these are the two options available to small business people.
The differentiation is clear: In the former cases, our new definition of a small business, there's a direct relationship between the net profits of the business and the taxable income of the business owner, because the net profits of the business constitute the taxable income of the proprietor.
In case after case, ever since the implementation of the income tax in the United States, tax increases have resulted in economic growth, while tax cuts have resulted in economic stagnation.
The reason for this is self-evident to anyone who has ever filled out a form 1040 tax return:
When you own a business, regardless of whether it is a sole proprietorship, a partnership or a Subchapter S corporation, you have to claim the net profit from your business on your tax return, if there is a profit, or show the loss if there was a loss.
If we increase the federal tax rate on personal income, business owners will everything they can to reduce their net profit....and that means hiring additional employees, expanding facilities, buying or leasing equipment, or making other capital expenditures that can be written off while helping to generate future profits through increased productivity.
If we decrease the federal tax rate on personal income, the business owner is less inclined to make those expenditures because they will get to keep more of those net profits.
It's as simple as that....but both political parties have consistently avoided admitting that this is the case.
Tax increases generate growth because they increase the incentive to re-invest profits into the business activity....or to start new businesses to shelter the income from taxation.
President Obama's decision to extend the Bush tax cuts for tax payers with up to $250,000 in NET INCOME (after deductions) was a palliative designed to upstage the Republicans tax agenda....but the net result of any tax cuts will be job losses and economic stagnation.
The Republican's insistence upon tax cuts as the solution to our economic problems is belied by the fact that, although we have the highest effective income tax rate among the developed nations of the world, we nevertheless have the strongest economy. If the Republican economic theories were correct, we would be coming apart at the seams....and we're not.
The real Republican agenda is that they are trying to starve the beast....government....by cutting off tax revenues.
The myth that tax cuts would generate increased tax revenues from increased taxable income is belied by the previous analysis. Tax cuts don't free up capital for re-investment. They free up capital for re-distribution to business owners and shareholders.