Tax Rates And The "Small Business" Zombie Lie

››› ››› ALBERT KLEINE & ALAN PYKE

Conservative media figures have long insisted that top marginal income tax rates effectively target small businesses. This "zombie lie" has sprung up throughout President Obama's first term as an argument against Democratic proposals to renew the Bush-era rates only for middle- and low-income Americans.  Despite continual efforts by experts to debunk this claim, media figures continue to repeat these lies in the 2012 edition of the fight over high-income tax rates.

They Said It In 2008...

October 2008: America's Election Headquarters Co-Host Asserts That Three Quarters Of Top Marginal Rate Payers Are Small Businesses. On the October 24, 2008 edition of Fox News' America's Election Headquarters, co-host Brian Sullivan said: 

Seventy-five percent of the people that make over $250,000 a year are small business owners. At what point do those people simply give up because for every marginal dollar they create for the economy, they're penalized for. [America's Election Headquarters, 10/24/08, via Nexis]

October 2008: Karl Rove Alleges Three Of Every Four Taxpayers Affected By Raising Top Rates Are Small Business Owners. In a Wall Street Journal op-ed, columnist Karl Rove wrote: 

So while Mr. Obama says that only the top 5% will pay higher taxes under his proposals, many voters are skeptical. Nearly three out of every four filers who'll pay higher taxes under a President Obama are small businesses, the source of most new jobs and growth. An Urban Institute-Brookings Institution Tax Policy Center study found that 663,000 (73%) of the 912,000 filers hit by Mr. Obama's tax increases will report business income -- i.e., they are small business owners. His tax hikes will affect every worker at those enterprises. [The Wall Street Journal, 10/2/08, via Factiva]

August 2008: Glenn Hubbard Claims Candidate Obama "Is Committed To Raising Taxes On Successful Small Business Owners." In a 2008 Wall Street Journal op-ed, former Council of Economic Advisers head Glenn Hubbard wrote: 

If Mr. Obama is going to increase spending, will he raise the money by higher business taxes instead? He has already distanced himself from John McCain's call to reduce America's corporate tax rate, and he is committed to raising tax rates on successful small business owners who pay individual as opposed to corporate income taxes. [The Wall Street Journal, 8/21/08, via Factiva]

...It Was Echoed By The GOP Presidential Campaign...

October 2008: McCain Chief Economic Adviser Says That Small Businesses Are "In The Crosshairs" Of Increases In Top Income Tax Rates. From the October 14, 2008, edition of MSNBC's Race For The White House, McCain-Palin 2008 Chief Economic Adviser Douglas Holtz-Eakin said:

Well, Steve has got a point in that it's not just tax policy. But tax policy is important. And the ideological drive to raise those top tax rates are catches in the crosshairs, the small businesses that in this economy, a very weak and damaged economy have created 331,000 jobs this year. Those top two tax rates hit the companies that create 56 percent of small business income, 84 percent of Americans work in small businesses. Why would you have the judgment to attack the one strong point in the U.S. economy? [Race For The White House, 10/14/08, via Nexis] 

... And It Was Wrong Then

Center On Budget And Policy Priorities: Raising Top Tax Rates Affects A Small Number Of Small Businesses. In a February 2009 report, the Center on Budget and Policy Priorities found that only 1.9 percent of small businesses would be affected by raising the top two tax rates. As Media Matters noted in October 2008, the top two tax rates would include all households making more than $195,850. Since President Obama's proposal was to increase taxes only on incomes over $250,000, this figure slightly overestimates the percentage of small businesses affected.

CBPP

[Center on Budget and Policy Priorities, 2/2/09]

They Said It In 2010...

July 2010: WSJ's Moore Claims High-Income Tax Rates Target Small Businesses. On the July 26, 2010, edition of On The Record, Steve Moore, editorial board member of The Wall Street Journal, said: 

I think the big problem is even the higher income tax rights which Tim Geithner said he wants to raise, it turns out over half of that income is income of small business owners and operators and investors. You can't create jobs if you tax those people more. 

[...] 

And another thing to think about, if we allowed the top tax rate to go to 40 percent, small business operators and owners are going to pay a higher tax rate than ExxonMobil or Disney or major corporations, because the corporate tax rate is 35 percent. There's not a lot of fairness in that. [On The Record, 7/26/10, via Nexis]

September 2010: AEI Researchers Say Nearly Half Of Small Business Income Will Be Hit By Higher Taxes. From a Wall Street Journal op-ed by the American Enterprise Institute's Kevin Hassett and Alan Viard: 

The impact is far more severe than Mrs. Pelosi and Mr. Biden suggest. In fact, the sound bite about 3% of small businesses, which has been picked up by numerous pundits, is one of the more misleading statements in the long history of economic propaganda. The 3% figure, which is computed from IRS data, is based on simply counting the number of returns with any pass-through business income. So, if somebody makes a little money selling products on eBay and reports that income on Schedule C of their tax return, they are counted as a small business. The fact that there are millions of people in the lower tax brackets with small amounts of business income may be interesting for some purposes, but it is irrelevant for the assessment of the economic impact of the tax hikes. The numbers are clear. According to IRS data, fully 48% of the net income of sole proprietorships, partnerships, and S corporations reported on tax returns went to households with incomes above $200,000 in 2007. That's the number to look at, not the 3%. [The Wall Street Journal9/3/10

November 2010:  Fox's MacCallum Interrupts Guest To Insist That Half Of High-Income Taxpayers Are Small Businesses. From the November 12, 2010, edition of America's Newsroom, Fox News host Martha MacCallum had the following exchange with Democratic strategist Maria Cardona:

MARIA CARDONA (Democratic Strategist): Well I think a couple reasons. First of all because I know that Republicans like to argue that the tax cuts for the top income earners are going to affect small businesses, but in fact, that's not true. Ninety-nine percent of small businesses do not fall into the top one percent of income earners in this country -

MARTHA MACCALLUM (Host): No, That is not true, actually. In fact, half of the people that make -

CARDONA: No. It is true -

MACCALLUM: Wait, Maria. Hold on, I'm going to call you on that because half of the people who make over $250,000 a year in this country are running a small business. Half of them. So, you know, this notion that it's not going to make a difference - and if you talk to small business owners across the country, which, you know, I do whenever I get the chance to, they'll tell you I'm not hiring, I'm worried about health care, I'm worried about this. So why not pull the brakes off of them and help them out? [America's Newsroom11/12/10, via Media Matters]

November 2010: Fox's Bolling Asserts That "Half Of The Filers Over $250,000 Will Be Small Business." From the November 19, 2010, edition of Fox News' America's Newsroom:

BILL HEMMER (Host): Lay it out, what happens here?

ERIC BOLLING: OK, so, we have the Republicans who say, let's let all the tax cuts go forward forever. The Democrats are saying no, only the middle-class tax cuts, the people making over 250,000, those people can't have the tax cuts go forward. The problem here is, guys, this is it, right here: Half the filers over $250,000 will be small businesses. [America's Newsroom11/19/10, via Media Matters]

December 2010: According To Fox Nation, "Dems Vote To Raise Taxes On Small Business, Job Creators." On December 2, 2010, Fox Nation used the following headline for an article on a House vote on the Bush tax cuts:

Fox Nation

[FoxNation.com, 12/2/10, via Media Matters

... And It Was Wrong Then, Too

Tax Expert William Gale: "The Vast Majority Of Small Businesses Will Be Unaffected" By Higher Rates On Top Earners. William Gale, co-director of the Urban-Brookings Tax Policy Center, explained how the idea that "allowing the high-income tax cuts to expire would hurt small businesses" was a "myth." From The Washington Post:

If, as proposed, the Bush tax cuts are allowed to expire for the highest earners, the vast majority of small businesses will be unaffected. Less than 2 percent of tax returns reporting small-business income are filed by taxpayers in the top two income brackets -- individuals earning more than about $170,000 a year and families earning more than about $210,000 a year.

And just as most small businesses aren't owned by people in the top income brackets, most people in the top income brackets don't rely mainly on small-business income: According to the Tax Policy Center, such proceeds make up a majority of income for about 40 percent of households in the top income bracket and a third of households in the second-highest bracket. If the objective is to help small businesses, continuing the Bush tax cuts on high-income taxpayers isn't the way to go -- it would miss more than 98 percent of small-business owners and would primarily help people who don't make most of their money off those businesses. [The Washington Post8/1/10]

American Enterprise Institute's Viard : Actually, Most Of These "Small Businesses" Are "Very Large." Two weeks after co-authoring an op-ed in The Wall Street Journal, in which he argued that top income tax rates do have a "severe" impact on the small business community, AEI's Viard was quoted in The Washington Post acknowledging that Republican rhetoric about small businesses is politically motivated and based on a "fallacy":

A separate analysis by the nonpartisan Tax Policy Center found that only about 10 percent of business income above the threshold was reported by sole proprietorships, with the rest coming from partnerships and S corporations, which can be extremely large. Alan Viard, an economist in the Bush White House who is now at the American Enterprise Institute, agreed that many firms represented in the top tax brackets are hardly small. Economically, that doesn't matter, he said: Obama would still be raising taxes on a significant source of jobs and economic activity. Politically, however, it's a very different matter to raise taxes on a Wall Street hedge fund than it is to tax your neighborhood dry cleaner. Which is why Republicans continually define pass-through entities of all sizes as small businesses, a position Viard called a "fallacy." "How can it be that 3 percent of owners are accounting for 50 percent of small business income? Those firms they're owning can't be all that small," Viard said. "And that's true. They're very large." [The Washington Post9/17/10]

They Said It In 2011-12...

September 2011: "Surely This Tax Hike Will Reduce Small-Business Hiring" Because  "Roughly Half The Income Of Small Businesses" Would Be Hit By Top Marginal Rates. From Charles Krauthammer's nationally syndicated column: 

Now that he's president, Obama has actually gone and done it. He's just proposed a $1.5 trillion tsunami of tax hikes featuring a 'Buffett rule' that, although as yet deliberately still fuzzy, clearly includes raising capital gains taxes. He also insists again upon raising marginal rates on 'millionaire' couples making $250,000 or more. But roughly half the income of small businesses (i.e., those filing individual returns) would be hit by this tax increase. Therefore, if we are to believe Obama's own logic that his proposed business tax credits would increase hiring, then surely this tax hike will reduce small-business hiring. But what are jobs when fairness is at stake? Fairness trumps growth. Fairness trumps revenue. Fairness trumps economic logic. [The Washington Post9/22/11, emphasis original]

January 2012: Rove Claims "Most Of The People That You Are Trying To Raise Taxes On Are Actually Small Businesses." On the January 25, 2012, edition of The O'Reilly Factor, Karl Rove said: 

Because it's going to require somebody on the Republican side to step up and not simply make the economic argument. The economy is fragile. It shouldn't be raising taxes on anybody. Not the efficiency argument. Most of the people that you are trying to raise taxes on are actually small businesses filing on the individual chart. We ought to make the moral argument that there has to be a limit to what the government can take from anybody. Because if they can take it from somebody, they can take it from anybody. [The O'Reilly Factor, 1/25/12, via Nexis]

April 2012: Fox Business' Willis Agrees With Norquist That "Most Small Businesses Pay" Individual Income Tax At Top Marginal Rates. On the April 17, 2012, edition of The Willis Report, host Gerri Willis had the following exchange with Grover Norquist, president of Americans for Tax Reform:

GROVER NORQUIST: Yes. It's over $100 billion. Year one. So, it's a huge, huge hit. Then, on the individual level, the tax rate goes up to 39 1/2, plus the Obamacare tax. So, approaching 45 percent. That's also the tax that most small businesses pay. Most 80 percent of small businesses aren't corporations. They're partnerships --

GERRI WILLIS: Absolutely.

NORQUIST: -- and subchapter-S companies. So, they pay the personal income tax which is going up to 45, even as some moderates say, well, why don't we take the corporate income tax down from 35. They may, but for most small businesses, for the people employ a majority of Americans, they're looking, if Obama gets reelected, if you have a Democratic Senate, up to 45 percent. [The Willis Report, 4/17/12, via Nexis]

October 2012: CNN Fact-Checking Segment Endorses Claim That Top Tax Rates Target Small Businesses. From CNN's coverage of the October 11, 2012, vice-presidential debate:

JOHN BERMAN, CNN CORRESPONDENT: You know, the candidates continue to war on taxes with Paul Ryan claiming that President Obama wants not just to raise them on small businesses, but to put them over 40 percent.

(BEGIN VIDEO CLIP)

REP. PAUL RYAN (R-WI), VICE PRESIDENTIAL NOMINEE: What President Obama wants to do is raise the top tax rate on our successful small businesses and our manufacturers to much higher tax rates than our foreign competitors, above 40 percent.

(END VIDEO CLIP)

BERMAN: So, what are the facts here? The top rate paid by top earning small businesses would rise to nearly 40 percent if the Bush tax cuts expire on those top earners as President Obama wants. Many small businesses are taxed as individuals.

Now, the rate on small businesses would go above 40 percent if you included additional Medicare taxes on the wealthy. So, our verdict here is mostly true. Some small businesses at the very high-end could end up with a tax rate of more than 40 percent. [CNN, 10/11/12, via Nexis]

November 2012: CNN's Piers Morgan States Small Business Income Tax Myth As Fact. On the November 9, 2012, edition of Piers Morgan Tonight, host Morgan said: "One of the problems, of course, if you do raise taxes, is a lot of Americans who would then be brought into that bracket are small business owners. And they are concerned, quite naturally, that that may slow down their ability to grow and to create jobs." [Piers Morgan Tonight, 11/9/12, via Nexis]

... And It's Still Wrong

CBPP: "Claims That Letting The High-Income Bush Tax Cuts Expire Would Harm Small Businesses Are Vastly Exaggerated." A post on the Center on Budget and Policy Priorities' Off the Charts blog noted that "history refutes the doomsday claims" that "letting the high-income tax cuts expire would seriously harm small businesses":

For starters, the frequently cited claim that letting the high-income tax cuts expire would seriously harm small businesses relies on a highly exaggerated definition of "business" that treats any filer with any pass-through income as a business owner.  (A pass-through entity passes its profits through to its owners, who pay tax on them at the individual rate.)

[...]

[H]istory refutes the doomsday claims. The arguments against allowing the high-end tax cuts to expire on schedule echo those made against President Clinton's proposed 1993 tax increases, which set marginal rates at the levels to which they are set to return when the Bush rate cuts expire. Critics claimed at the time that those tax increases would seriously harm economic growth.  As it turned out, job creation and economic growth proved significantly stronger following the 1993 tax increases than following the 2001 Bush tax cuts. Further, small businesses created jobs at twice the rate during the Clinton years than they did under the Bush tax code. [Center on Budget and Policy Priorities, 7/19/12]

U.S. Congress Joint Committee On Taxation: 3.5 Percent Of Small Business Taxpayers Will Have "Marginal Rates Of 36 Or 39.6 Percent Under The President's Proposal." A memorandum from the Joint Committee on Taxation, a congressional panel that analyzes tax proposals, explains that "3.5 percent of all taxpayers with net positive business income" will face higher rates. All other small businesses that pay taxes as an individual will pay the lower rates. From the Joint Committee On Taxation:

The staff of the Joint Committee on Taxation estimates that in 2013 approximately 940,000 taxpayers with net positive business income (3.5 percent of all taxpayers with net positive business income) will have marginal rates of 36 or 39.6 percent under the president's proposal, and that 53 percent of the approximately $1.3 trillion of aggregate net positive business income will be reported on returns that have a marginal rate of 36 or 39.6 percent. [Joint Committee On Taxation, 6/18/12]

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