Would Small Business Be Hurt by Obama’s Tax Plan?

Would Small Business Be Hurt by Obama’s Tax Plan?

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If there is one thing that Democrats and Republicans agree on, it’s that they love small business. So it was probably inevitable that the battle over extending the Bush tax cuts would lead to dueling statistics about what’s best for small business owners.
Specifically, would small business be hurt by President Obama’s plan to let the tax cuts expire for the top 2 percent of households earning more than $250,000 a year?

It’s an important question, because small companies employ a big share of the job force and generate a substantial share of the nation’s net job growth

Under Obama’s proposal, the Bush tax cuts would be made permanent for households with incomes below $250,000.But the top two tax rates would jump from 33 to 36 percent and from 35 to 39.6 percent.

Because millions of small business owners report business profits on their individual tax returns, Republicans argue, higher individual rates would mean higher taxes  on a wide swath of the very small companies that produce so many jobs.

But how many would be affected?  Enter the dueling statistics.

Republicans, citing stats from the nonpartisan Joint Committee on Taxation, say the higher rates would “capture’’ about 50 percent of income from small business and “affect’’ 25 percent of all jobs. (See this clip of Senate minority leader Mitch McConnell).

 Democrats, also citing statistics from the Joint Committee, say the opposite.  By their reckoning, only 3 percent of small business owners are in the top two brackets and would see any tax increase at all. 

Who’s right?

The short answer: both statistics are true, but the Republican claim is false. 

According to the Joint Tax Committee, which analyzed President Obama’s tax proposal, taxpayers will report $1 trillion in business income on their individual tax returns in 2011.  And just as Republicans claim, about 50 percent of that income is expected to be reported by people in the top two tax brackets.

But there is a big difference between “business income’’ and the small-business profits. Business income includes profits from real estate, royalties and limited partnerships for anything from real estate and oil drilling to venture capital and private equity funds. It also includes income from estates and trusts – so trust-fund babies are a part of the mix.

Put another way, much of what Republicans equate with small business income is investment income earned by wealthy people who hold stakes in a wide array of  ventures. 

Indeed, the Joint Tax Committee cautioned that the figures “do not imply that all the income is from entities that might be considered ‘small.’”In 2005, it noted, more than 6,000 partnerships and 12,000 “Subchapter S’’ corporations (which allow owners to report profits on their individual returns) had revenues above $50 million.

But the United States has about 1.5 million small businesses, and the vast majority of business owners earn modest incomes.  According to the Joint Tax Committee, only 750,000 people – about 3 percent of those who report positive net business income – would be affected by the higher rates.

“The data clearly shows that most small businesses would be completely unaffected by the higher rates,’’ said Chuck Marr, director of tax policy at the Center on Budget and Policy Priorities, a liberal think tank.  “For the last 30 years, we’ve had a tremendous concentration of income at the top for small businesses, just as we’ve seen for Americans in general.”

That doesn’t settle the debate. Even if only 3 percent of small business owners have incomes above $200,000, a raft of other studies show that an equally tiny share of small businesses account for much of the nation’s net job growth.

Should the tax system encourage people in that elite group because they deliver outsized results?

Perhaps. But it’s also worth remembering that small businesses already benefit from scores of special tax breaks.  For starter, the ability to report profits from a small company or even a big partnership means that business owners avoid the separate corporate tax of up to 35 percent.

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