Fiscal Cliff Deal Offers Minimal Benefit To Microbusinesses

There was a certain amount of unusually undignified jumping up and down and yelling about looming fiscal cliffs during the last month of last year, and with good reason.

The deal that the President and Congress put together to force each other to deal with expiring tax cuts at the beginning of this year seemed like a strategy that was doomed to failure.

The fundamental disagreement was simple and fairly typical: Democrats wanted to preserve middle-class tax cuts, raise taxes on the rich and preserve as much domestic spending as possible, while Republicans wanted to preserve all the tax cuts and find savings by cutting social programs and other non-defense discretionary spending.

It doesn’t often get much more unambiguously partisan than that.

In the end, circumstances forced the Republicans to meet the President halfway, giving him a final legislative victory just before showing the 112th Congress the door. I’m guessing that it’s easier to stand your ground when you have a campaign promise to keep and you are not the lame duck in the room.

I’d bet that almost everybody involved is sorely relieved. Except, perhaps, House Republicans.

The final compromised reached largely between Senate Republicans, led by Minority Leader Mitch McConnell (R-KY) and his former foe and colleague, Vice-President Joe Biden, calls for the Bush tax cuts to be made permanent for couples earning less than $450,000 per year ($400,000 for individuals). Capital gains taxes would remain at the 15% level for those lower income households, while the upper income crowd would see their income tax rate increase from 35% to 39.6% and their capital gains tax rate would climb to 20%.

House Republicans, in an attempt to take their lemons and make whiskey sours, are claiming victory and vindication because Democrats finally caved and made even some of the Bush tax cuts permanent — which President Bush was counting on all along. And, even though the more liberal Democrats view the President’s compromise as yet another failure on his part to hold out for left-wing purity, they are hailing the tax increase as a victory and an early instance of President Obama keeping a campaign promise.

In the meantime, you might be forgiven for wondering if there is anything in this legislative bally-hoo that will be of benefit to microbusiness owners.

Back in mid-December, the National Association for the Self-Employed (NASE), the only national advocacy organization specifically for microbusinesses, expressed its unhappiness with the evident inability of Congress to get its act together to avoid a tax hike that will hit middle-class microbusiness owners right where it hurts.

According to the NASE’s analysis of the impact of inaction, microbusiness owners earning between $60,000 and $88,000 would have been looking at a tax hike of between $2700 and $3700 per year.

Of course, most microbusinesses don’t actually make that much money. The overwhelming majority of them are nonemployers and their average annual earnings, as of 2010, were about $43,000 per year.

So, while there are some high earners among microbusiness owners who might be disappointed at this legislative turn of events, the majority of them will benefit from getting to keep their current tax rates intact.

The rest of the supposedly small-business-friendly items in this legislation — such as a temporary extension of the $500,000 Section 179 expensing cap and the R&D tax credit, a permanent estate tax exemption of $5 million (indexed to inflation), a permanent “fix” for the alternative minimum tax (the AMT won’t kick in until a couple filing jointly reaches an earnings level of $78,750, also indexed to inflation) — won’t apply to most small businesses.

And some small business advocates are disappointed at what they are calling a stop-gap measure that falls well sure of a much-needed comprehensive overhaul of the tax system.

Said Todd McCracken, President of the National Small Business Association, in a press release:

“While the permanent extension for the lower tax rates is a positive, tax increases—at any level—should only have been done within the context of broad tax reform.”

The NASE has not yet released a statement in response to the fiscal cliff deal.

Fiscal Cliff Photo via Shutterstock

Dawn R. Rivers Dawn R. Rivers, an award-winning small business journalist, regularly reports and analyzes small business policy and research as the publisher of the MicroEnterprise Journal. She also publishes research at the Microbusiness Research Institute and she blogs at The MicroEnterprise Journal Blog.