TARP Jr. misses the mark on job creation

The majority party’s response to the bad economy is passing legislation and hoping it’ll work, regardless of the track record of similar proposals.

The latest example is the small-business package with $30 billion of taxpayer dollars to banks for small-business loans. 

To a lot of us, the fund looks like the Troubled Asset Relief Program, which has been badly mismanaged. 

Elizabeth Warren, head of the TARP congressional oversight panel, and the president’s just-chosen head of the new Consumer Financial Protection Bureau, expressed skepticism that the small-business fund would effectively target lending to businesses most likely to succeed. She said, “Such a fund runs the risk of creating moral hazard by encouraging banks to make loans to borrowers who are not creditworthy.’’

Neil Barofsky, the TARP special inspector general, said, “In terms of its basic designs, its participants, its application process, and, perhaps its funding source from an oversight perspective, the [fund] would essentially be an extension of TARP’s Capital Purchase Program.”

There’s also disagreement about the cost. Proponents argue the lending fund will raise $1.1 billion. However, the Congressional Budget Office has indicated that if scored on a fair-value basis, as the TARP bill was, the program would cost taxpayers $6.2 billion. The CBO says the “fair-value” basis is a more comprehensive measure of the cost than estimates done on a cash basis. 

Meanwhile, proponents of creating this fund argue preventing a tax increase for taxpayers in the top two brackets is unnecessary and unaffordable. 

But if the top two marginal tax rates go up, half of all flow-through business income will get hit, according to the non-partisan Joint Committee on Taxation. This is especially harmful to small businesses. Most of them operate as flow-through entities. The income earned by the business flows through the business, onto the business owner’s individual tax returns.

The proposed rate hike on the top two brackets would be a 17 to 24 percent increase of the marginal tax rate on half of all flow-through business income.

The tax increase would make the 9.6 percent unemployment rate even worse. Small businesses create 70 percent of new jobs. There are more than 20 million jobs in the businesses that will get hit with tax increases on the top two brackets if Congress doesn’t act to prevent the increases. If their taxes go up, small businesses would lay off some of their current employees and stop some of the new hiring that would have occurred otherwise.

Small businesses are already hesitant to hire new workers.  According to the National Federation of Independent Business’s most recent survey:

• a net negative 1 percent of business owners plan to create new jobs in the next three months;

• a net negative of 8 percent of business owners expect the economy to improve;

• only 4 percent of business owners said it was a good time to expand; and

• a net negative 30 percent of owners reported higher earnings.

This last part is especially important for hiring; businesses need to know that the revenue generated from the additional employee will exceed the cost.

The $800 billion stimulus bill was a spending program that didn’t work as promised. The administration promised unemployment would not go above 8 percent if Congress enacted the stimulus, and 90 percent of the jobs would be in the private sector.

Yet unemployment is still high. Many people stopped looking for work. The unemployment rate reached a high of 10.1 percent in October 2009, then a low of 9.5 percent in July 2010, but once again ticked up to 9.6 percent as 114,000 temporary census jobs ended. 

Small businesses continue hemorrhaging jobs. 

According to ADP National Employment data, since the stimulus, small businesses — with fewer than 500 employees — have lost a net 2.6 million jobs. 

The small-business tax provisions passed with the lending fund are good policy, although they should have been even stronger. The provisions are temporary; my bill that was the basis for many of them would have made them permanent. The bill also excluded my provision to provide small businesses with a 20 percent deduction off of their small business income.  This was the largest, most important provision in my bill.

Not only does the majority party want to raise marginal tax rates on half of all flow-through business income, but it also wants to raise capital gains and dividends rates, limit itemized deductions, and take away personal exemptions for certain taxpayers.

But when you raise taxes on investment, you get less business activity. That means less investment, lower wages, and fewer jobs. Instead of enacting spending programs of dubious effectiveness, Congress should, at a minimum, keep tax rates at current levels and give small businesses the confidence to invest and create jobs.

Sen. Grassley is the ranking member of the Finance Committee.