It’s not just the presence of taxes, it’s the anticipation of the future tax landscape that plays a decisive role in decisions made by small businesses.
And part of the landscape that contributes to the bleak economic news highlighted in weekly and monthly reports are the huge tax increases slated for 2013.
In fact, the U.S. faces a $600 billion fiscal cliff at the end of 2012 that includes a $440 billion tax increase and $108 billion in across-the-board spending cuts. The two together add up to twice the size of the growth in the U.S. gross domestic product this year, according to Douglas Holtz-Eakin, president of the American Action Forum and former director of the Congressional Budget Office.
As we reach the edge of the cliff, the likelihood that small businesses will hire will decrease by 18 percent, and the effective marginal tax rate for many workers and small businesses will be pushed above 50 percent of their income, according to an AAF study.
While the policy changes do not take effect until 2013, the impacts are being felt across the economy as uncertainty increases and confidence and consumer spending decrease.
Most practitioners are aware of the tax increases slated to take effect as the result of the expiration of the Bush era tax cuts. The corresponding spending cuts are caused by the failure of the “supercommittee” created by the Budget Control Act of 2011, which will result in a mandatory sequestration to defense discretionary spending, non-defense discretionary spending, and Medicare spending. The sequestration would take effect, along with the tax increase, in January 2013.
Does this affect behavior? “I think so,” said Holtz-Eakin. “One would expect that if you’re a dividend investor and will go from a 15 percent tax to as high as 45 percent, it’s big. You have to consider the chances that this will happen. The more you think the gridlock will affect taxes, the more it will affect your behavior. It will slow hiring and slow investment. These may not be enormous effects yet, but they’re not zero.”
If there’s a silver lining, it just might be in an improvement in the business-for-sale market, according to BizBuySell.com, an Internet market for buying or selling a small business. Although the company’s Second Quarter 2012 Insight Report shows a drop in reported business-for-sale transactions relative to the same time period in 2011, uncertainty regarding the future of the capital gains tax may provide an additional reason for owners to sell.
“Based on discussions with brokers and our understanding of the market, the uncertainty around the potential for a capital gains increase will likely cause some small business owners to try and accelerate their business exit into 2012,” said Mike Handelsman, group general manager of BizbuySell.com. “Even if an owner thinks he or she can get a better closing price in 2013, the difference could be negated through a lower after-tax take if the tax cut isn’t extended. Brokers and other advisors know this and will likely encourage owners to expedite the sales process in the next six months.”
