Wall Street Journal Pushes Myth That Income Tax Increase On Wealthy Harms Small Businesses

Blog ››› ››› ZACHARY PLEAT

The Wall Street Journal pushed the misleading claim that small businesses will be harmed by slightly increasing the top tax rates on the wealthy. In fact, only about 3 percent of small businesses will pay more in taxes under President Obama's plan to let the Bush-era tax cuts expire for household incomes above $250,000.

A Journal article claimed that "[i]f ideas proposed by the White House take hold -- a long shot -- rates for big companies likely would fall next year while those paid by many small-business owners through the individual tax system would rise." One of the president's key positions in deficit talks with Republicans is to raise revenue by not extending the Bush tax cuts on incomes over $250,000. Conservatives have long claimed that this policy would significantly impact small businesses, and Thursday's Journal repeated this claim:

These businesses account for about half of U.S. business income and more than one-third of private-sector employment, by some estimates. That growth has fueled tension between companies that continue to pay the corporate tax and smaller concerns that pay their taxes through their owners' individual income-tax returns.

But experts say that this tax increase will only affect a tiny portion of small businesses. The congressional Joint Committee on Taxation explained in a June memorandum that only "3.5 percent of all taxpayers with net positive business income" will face higher marginal rates. In July 2010, the non-partisan Tax Policy Center estimated that only 2.5 percent of these small businesses would face the higher tax rates.

Experts also say that many of the businesses that earn enough income to be impacted by higher marginal tax rates are not traditional small businesses. Former George W. Bush economist Alan Viard told The Washington Post: "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." The Center on Budget and Policy Priorities explained that the definition of "small business" used when discussing business income includes "concerns like large corporate law practices, accounting firms, and wealthy people who invest in financial and real estate partnerships." TaxVox editor Howard Gleckman elaborated in May 2011 on the problem with claiming these tax increases would harm small businesses:

[T]here is an awful lot we don't know. For example, we don't know how many are real businesses and how many represent a bit of side income for people otherwise employed at regular jobs (imagine, for instance, a tax economist who picks up a few bucks reviewing smartphones on the Web). At the same time we don't know much at all about those hedge funds, law firms, and real estate partnerships that likely account for a large share of the total business income reported on individual returns.

Posted In
Economy, Taxes
Wall Street Journal
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