ROBERT SIEGEL, HOST:
Now to one of the big sticking points in Washington these days. Much of the debate over impending tax hikes and budget cuts centers on the tax rate for top earners. President Obama argues the tax rate for income over $250,000 a year should be allowed to go up. Republicans say there should be no change in tax rates. When Democrats talk about raising taxes on the wealthy, Republicans hear it as raising taxes on small businesses and killing jobs.
Well, NPR's S.V. Date has been exploring that argument.
S.V. DATE, BYLINE: Every time President Obama explains why he wants to increase taxes on the richest two percent, Republicans have a ready answer. Most small business owners file their taxes as individuals and a tax hike would discourage them from hiring new workers. So, when Mr. Obama visited a toy factory in Pennsylvania recently to push for his tax plan, House Republicans countered with this video, also featuring a Pennsylvania business.
(SOUNDBITE OF TV AD)
JERRY GORSKI: I'm Jerry Gorski from Gorski Engineering Company. Gorski Engineering is a subchapter S corporation, so however good or bad we do is my income.
DATE: But as to that fundamental Republican argument that a higher tax rate would make it harder for him to hire new workers...
GORSKI: I don't know that that would be true for my business or a different business, unless we understood the complete situation.
DATE: His particular situation includes saving up cash over a number of years to hire highly paid employees or buy an expensive piece of construction equipment. He says a higher tax rate would make that harder.
GORSKI: If I start to build a nest egg again, if I start to invest in equipment and things, but I don't have as much to do that or invest in people, which is our biggest resource, I don't have as much to do that, that's going to be difficult.
DATE: But most small businesses say potential profit from a new hire, not the tax rate, is the most important factor. Is that new employee going to generate more money? Other owners even say that the way the president's tax hike is structured, many businesses might actually see an incentive to hire extra workers. Mike Brey owns Hobby Works, a group of toy stores in the Washington, D.C. area.
MIKE BREY: If anything, it may encourage additional capital investment because that would then lower your potential tax rates.
DATE: If this seems counterintuitive, the answer lies in the way businesses calculate their taxes. Mr. Obama's proposal would increase the tax rate, but only for income that exceeds a quarter million dollars per family. For about 97 percent of small business owners, that higher rate is irrelevant. They make less than $250,000 a year. And for those whose income works out to be just over that threshold, one solution might be to hire one more person or finally replace that 10-year-old car. And with these investments, pull net income back under that quarter-million-dollar mark. Mike Roach's Paloma Clothing store has been in Portland, Oregon for 37 years.
MIKE ROACH: I think if you're a person who hates paying taxes, hiring another employee for, you know, 30 to $40,000 a year is a great way to stay below the new so-called marginal rate.
DATE: Brey, the owner of Hobby Works, says there's nothing really new in this tax strategizing.
BREY: The fact of the matter is, businesses, all businesses large and small, do this all the time.
DATE: One business strategy is to keep plowing extra profit back into the business to avoid those higher tax rates. Eventually, the owner can sell the business or take it public and convert those years of deferred income into a big cash payout. Selling a business, Brey points out, is considered capital gains, taxed at a lower rate.
BREY: Right now, a much lower rate.
DATE: S.V. Date, NPR News. Transcript provided by NPR, Copyright NPR.