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September 05, 2008

A "Non Sequitur" is defined in Wikipedia as follows:

Non sequitur (IPA: /nɒnˈsɛkwɪtər/) is Latin for "it does not follow". It is most often used to indicate something which does not follow logically, such as a stated conclusion that is not supported by the facts. Non sequitur may refer to:

Non sequitur (logic), a logical fallacy

Non sequitur (humor), a comment that has no relation to the preceding comment or to an ongoing discussion or topic

Non Sequitur (comic strip), a comic strip by Wiley Miller

"Non Sequitur" (Star Trek: Voyager), an episode of Star Trek: Voyager

We'll note that Wiley Miller lives in Iowa City. We'll also note that a recent report from the Center for Budget and Policy Priorities illustrates the "logical fallacy" non sequitur:

The CBPP seems to like the idea of jacking up individual rates. Of course, that means raising the rates of pass-through businesses, like S corporations, whose income is taxed on the returns of their owners. As far as their recent report is concerned, that's not a problem:

First, critics charge that allowing the 2001 tax cut's reduction in the top two marginal income tax rates for individual taxpayers to expire as scheduled would affect a large proportion of small-business owners. In fact, only 1.9 percent of filers with any small-business income are projected to face either of the top two income tax rates in 2009.1

Where to start? Maybe with the strawman: that "critics" are saying the problem with such tax increases is the proportion of tax returns with small business income that would be affected. The otherwise well-footnoted CBPP paper doesn't cite any such critic.

When you look at the pool of returns that give the CBPP it's 1.9% figure, you'd find it hard to see how it could be even that high. To them, a small business 1040 is:

...any tax unit that receives any income (or loss) from a sole proprietorship, farm proprietorship, partnership, S corporation, or rental income.

That includes every Amway, Mary Kay and Shacklee salesmen. It includes any of the thousands of taxpayers who hold, for even a few days, a few shares in a publicly-traded oil and gas partnership like Kinder Morgan. It includes every duplex owner that rents the other unit out, everybody who rents out a vacation cabin, and every e-bay business. Of course, most such taxpayers wouldn't see such income as their livelihoods; it would be a sideline or an investment. Would anyone expect that a large proportion of these returns would be in the top two brackets?

Jacking up the rate on the top two brackets -- returning the top rate to 39.6% -- would affect a large proportion of the income and economic activity generated by small businesses. It would affect the ones that are most important - the ones that are successful, growing and hiring. If they have less after-tax income, they won't be doing as much growing and hiring - and the cost comes not only from the small business owner, but for the person who doesn't get hired because the government has sucked more money out of the would-be employer's business.

Unfortunately, the CBPP doesn't give us statistics that tell us how much small business income would be affected by jacking up the top two tax rates. We can go to IRS statistics to get a rough idea of how much economic activity would be hit with higher taxes if the rates returned to 2000 levels. Of the S corporations, partnerships and non-farm proprietorships filing in 2003, just over 3% had over $1,000,000 in gross receipts, by my reckoning. The gross receipts of this 3% over 78% of the gross receipts of such businesses and 64% of the net income.

In short, looking at the effect of an individual rate increase based only on the percentage of 1040s effected grossly understates the impact this would have on the economic activity of small businesses -- particularly the healthy ones that contribute the most to employment and growth. Using CBPP logic, you could say that breaking the legs of all NFL players wouldn't hurt football because less than 1% of those playing football nationwide would be affected.

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