How Propaganda and False New Spread -- A Case Study of the Vice President's Promise of a $50,000 "Tax Benefit" for Start-Up Businesses

Smoke and mirrors

The most effective propaganda often contains a kernel of truth, often shrouded by intentional vagueness, ambiguities, half-truths and flat-out lies. This allows the proponents to have plausible deniability by focusing on that kernel when they are called out for misinformation. This article provides a case study of these techniques in connection with Vice President Harris’ recent promise to provide new small businesses a $50,000 tax cut that supposedly will enable them to cover the average $40,000 in start-up costs for such businesses. I submit that it is misleading propaganda wrapped around a kernel of truth.

To explain why, I will support what I say with facts and analysis rather than just offer unsupported opinions. This necessarily will include a brief discussion of some fundamental tax issues, including a description of the difference between a tax credit and a tax deduction. Many of you know this, but bear with me for the sake of those who do not, and for a complete analysis. For anyone who may stumble across this article accidentally and prefer something superficial and simplistic, please go watch Morning Joe or The View. For the rest of you, including my faithful subscribers, please read on. But, as always, draw your own conclusions.

The Vice President’s promises and representations.

Harris has promised the country that if elected she will give new businesses a $50,000 “tax cut” to pay for their start-up costs in forming their new business. Sounds great, right? Be careful. Her seemingly generous proposal for a $50,000 “tax cut” is not what it may seem to many voters. Some of you doubtlessly understand what she is proposing, but from what I have heard and seen, many do not. And the false impression has been reinforced by our “elite” media, which have spread its misconception far and wide.

The Harris-Walz campaign website says that as part of their “Equal Opportunity Agenda, “she will expand the startup expense tax deduction for new businesses from $5,000 to $50,000 ....” Fair enough, but how do she and her fellow travelers pitch that to voters? Her presentation does contain a kernel of truth but one that is cloaked in ambiguities, material omissions, and half-truths. Especially when it is picked up and repeated by her allies, these evolve into outright misrepresentations that she never bothers to correct.

Here is Harris making her promise on the campaign trail in New Hampshire:

The current tax deduction for a start-up is just $5,000. OK? So, you’ve got to make up the delta there. Got to figure out how you can do that. Not everyone has access to that kind of wealth and capital. So, part of my plan is we will expand the tax deduction for start-ups to $50,000. It’s essentially a tax cut for starting a small business. [All bolded emphasis is the author’s.]

You heard her (“[W]e will expand the tax deduction for start-ups to $50,000. It’s essentially a tax cut for starting a small business.").

In personal appearances Harris has unequivocally suggested that small businesses will actually receive the amount of the deduction to help them start up their new businesses. Here she is talking about the current $5,000 deduction for start-up costs.

So right now the tax deduction for start-up companies, for small businesses, is $5,000. I’m growing it to $50,000. Because nobody can start a business on $5000, right?

The kernel of truth is that she is proposing a tax deduction, which could reduce taxes. But you don’t “start a business” on deductions. Because most businesses don’t make a profit in the first year, they would need to take the deduction to reduce their taxes in future years when they finally make a profit. So, they are not going to “start a business” with a future deduction of any amount.

In addition, Harris clearly is implying that the current $5,000 deduction will generate $5,000 in savings that could be used to partially cover the cost of starting a business. As I will show below, that is simply not true.

Harris’ statement that it is “essentially a tax cut for small businesses,” is either a falsehood or, at the very least, a misleading ambiguity. I will wager that many, if not most, people hearing or reading that will think that under her plan, new small business owners will get a $50,000 “tax cut” to “start a business.” But that is not true. And any reduction in taxes that does ultimately occur will not come anywhere close to $50,000.

The truth is that relatively few people would be able to take advantage of this new “tax cut” and the maximum additional financial benefit that they would receive from her proposal would be less than $10,000, or 1/5th of the $50,000 “tax cut” that she implies.

Why Harris’ promise is misleading — Income tax 101 and how tax deductions and credits work.

To compute their taxable income, those who do not take the standard deduction must first compute their total gross income and then subtract from it all of their allowable deductions, such as the standard deduction for each child, mortgage interest, property taxes, etc. This resulting balance of revenue minus deductions is their taxable income. In short, taxable income = gross income minus allowed deductions. The tax due is then determined by multiplying that taxable income by the applicable tax rate. Thus, any deductions are pre-tax and simply reduce the amount of a taxpayer’s gross income that is subject to tax. Easy enough, right?

So — and this is key to our analysis — each dollar of a deduction does not save the taxpayer $1. Instead, it reduces the tax owed by a smaller amount that is equal to the tax that would otherwise be payable on that $1. So, if you have a $100 deduction and are in a 21% tax bracket, taking that $100 deduction will save you $21.

A tax credit, however, is substantially different from a deduction. It is a real reduction of the tax you would otherwise pay. The amount of the credit is deducted from your taxes after all allowable deductions have been taken and the tax has been computed. Thus, unlike a deduction, it is a direct dollar-for-dollar reduction of the tax that otherwise would be owed.

In short, a tax deduction is much less beneficial to the taxpayer than is a tax credit for the same amount.

What would the savings really be under Harris’ proposal?

Let’s take a look at just how much tax savings new business owners could get under Harris’ proposal. I will use an example a hypothetical couple who decide to incorporate their new business, which incurs start-up expenses of $5000 before the business actually begins with the new business being subject to the current 21% corporate income tax rate.¹

Current law allows a deduction of $5,000 for start-up costs. The tax savings from that deduction would be $1,050 ($5,000 x 21%). Under Harris’ proposed increase in the deduction of up to $50,000, the total maximum savings (using the current corporate tax rate of 21%) would be $10,500 ($50,000 x 21%). That is a net improvement of $9,450 over the $1,050 that is allowed today. That $9,450 is the true increase from Harris’ promised “tax cut.” But it is a far cry from both the $50,000 “tax cut” that Harris has promised, and from the $40,000 in average start-up costs that she implies it will cover. In short, Harris’ “tax cut” pitch is quite misleading.

You can fool some of the people some of the time — The myth metastasizes.

Harris’ allies in the ancien régime media contribute to the misrepresentations and confusion. Some probably are just confused; others no doubt know better. Here are a few examples:

CBS News ran with a favorable article lauding Harris’ supposed “$50,000 tax break for small businesses.” Here is how CBS pitched it:

Vice President Kamala Harris, the Democratic presidential nominee, on Wednesday proposed policies she hopes will help spur small business creation across the U.S. ….

For one, she wants to expand the small business tax credit tenfold — from $5,000 to $50,000 — to help startups cover the average $40,000 it costs to launch an enterprise.

You see that CBS made an affirmative misrepresentation: Harris’ proposal is not a “tax credit.” It is a proposed tax deduction. The maximum increase in the tax benefit, as noted above is $9,450, which is less than 10% of the $50,000 “tax break” that CBS’s reporter, Megan Cerullo, touts. That obviously does not come close to repaying “the average $40,000 it costs to launch” a new business as Harris and CBS suggest it would.

CBS’s mischaracterization is bolstered by its claim that Harris’ proposal is a “$50,000 tax break,” which obviously makes it sound like small businesses are going to save $50,000 in taxes. That reinforces CBS’s false statement that it is a “tax credit.”

Obviously, Ms. Cerullo does not understand the difference between a tax deduction and a tax credit. Her confusion is reflected in her conflation of the two when she writes: 

Harris' tax deduction proposal would also let new businesses wait until they turned a profit to claim the credit, if they so chose, to reduce their tax bill. 

Do these people not have editors, or are their editors just clueless bumpkins or shills for the Democrats? Oh, wait. Cerullo does have an editor, one Ann Marie Lee. Clueless or shill? Take a look at their reportorial expertise in their linked bios and you decide.

See how the myth spreads

Other media companies also enhanced the confusion. Here are screenshots of the promotions by MSNBC and NBC.

Both are misleading but MSNBC’s (unsurprisingly) is the worst. It’s headline that this is a “$50K tax reduction” is just untrue. There is no way that this $50K tax deduction would result in a $50K tax reduction, unless the taxpayer was in a 100% tax bracket so that every penny of their income is confiscated. That may be the Marxists’ dream, but it is not yet law here.

Even Fox Business’ Stuart Varney mischaracterized her plan:

I just want to press the point. When a political candidate comes up with what I think is a good idea, I have to call it a good idea.

And a $50,000 tax cut for small tax cut, not tax cut but a tax credit for startups or small businesses coupled with less red tape, I gotta say that is a good idea regardless of our other tax ideas.

Varney’s mischaracterization of Harris’ proposal as a “tax credit” that was a “good idea” metastasized across the web with Democrat support. Democrats.org touted it as support for Harris’ “New Way Forward.” A variety of leftist-oriented allies ran with it. Examples are here (The New Republic), here (Crooks & Liars), here (Yahoo! News), and here (the Drudge Report).

USA Today correctly labeled it as a deduction but then gave Harris cover by quoting her propaganda without any correction or qualification, saying that “Harris' campaign says the amount the amount is meant to cover the $40,000 on average in costs to start a small business.” That is more gaslighting: there is no way, of course, that this $50K deduction, with its maximum tax reduction of $10,050, will “cover” $40,000 in costs.

Some closing thoughts — Smoke and mirrors.

There are many other reasons why the Harris-Walz tax plans would create economic havoc. The Tax Foundation, which is described as “the world’s leading nonpartisan tax policy nonprofit” provides a detailed breakdown here. Its analysis details just some of the dangers and destruction that the Harris-Walz agenda will cause in the name of promoting their scheme for redistribution:

• Slower economic growth and a shrinking GDP

• Reduced US competitiveness worldwide and weakened “key drivers of US economic growth”

• Reduced wages

• Reduced employment

• Higher housing prices

• Harm to consumers by imposing “economically ruinous price controls” that will discourage the production of price-controlled goods

• Reduced ability to address the national debt crisis and slow the hypersonic debt increase

• More destructive Marxist economics in the form of wealth confiscation of “paper profits” from unrealized capital gains

There are more, but these points (and others) could merit a separate article about each and the propaganda campaign being waged to implement them. So, I will close with a final observation relevant to the phantom $50,000 “tax reduction” from the Harris-Walz proposed increase in the start-up deduction.

The tax savings from the proposed increased deduction is illusory.

When touting her plan to increase the start-up deduction, Harris does not mention how any savings for small corporations would be offset by her proposed one-third increase in the corporate income tax rate to 28%. That increase in corporate taxes would eat away and ultimately devour any savings from her proposed increase in the start-up deduction.

This example illustrates how this would occur.

1. Under Harris’ proposal, as shown above, assuming the corporate rate remains at 21%, the maximum tax savings from the $45,000 increase in the start-up deduction is $9,450.  

2. But that potential benefit from the increase in the deduction would be offset by her proposed increase in the corporate tax rate to 28%. How much will that offset be? The answer, of course, will depend on the amount of taxable income that the new corporation earns. Let’s use $150K for the net taxable income, after all deductions.  I have selected that figure for illustrative purposes because it is enough to allow the taxpayer-corporation to take full advantage of the increased start-up deduction.

3. Then let’s compute the tax on that $150,000 at 28% ($42,000) and 21% ($31,500). That shows that our hypothetical tax-paying corporation will be subjected to a net tax increase of $10,500 ($42,000 - $31,500). That increase is due solely to the increase in the tax rate to 28%.

4. You can readily see that the corporation’s ostensible $9,450 tax saving from the increase in the start-up deduction will be offset completely by the corporate tax increase to 28%, based on these numbers. Of course, different assumptions about income lead to different results. At lower levels of income there will be a small net savings, but the monetary savings from the increase in the deduction continues to shrink, and the corporate income rate increase will eat away at any saving and will quickly devour it completely.

Thus, when looking at the big picture instead of just an isolated segment of her tax plan, the ultimate result of Harris’ proposed $50,000 deduction if her 28% corporate tax rate is also adopted, would quickly become a net increase in taxes for the new corporation. Not exactly the result she and her allies are touting.

Does anyone think she understands this?

It is all smoke and mirrors.

1. There are other possibilities, of course. Some owners incorporate under Subchapter S of the Internal Revenue Code. Such Sub-S corporations are “pass-through” entities, and their income is taxed at the owner’s personal rate, which can be between 10% and 37%. I am using the standard corporate 21% rate to avoid an overly lengthy discussion of all the possible tax scenarios and related complexities.