Fox News is once again claiming that President Obama's proposal to allow the Bush tax cuts on income over $250,000 a year to expire could affect “as many as half” of small businesses. In fact, tax and budget experts estimate only a tiny fraction of small businesses will be affected.
President Obama Proposes Letting Bush Tax Cuts For The Wealthiest Americans Expire
Wash. Post: “President Obama Announced That He Would Support A One-Year Extension For Households Earning Less Than $250,000.” Obama announced his support for extending the Bush-era tax cuts to all households making less than $250,000:
President Obama on Monday called for an extension of the George W. Bush-era tax cuts for the middle class, setting up an election-year showdown with congressional Republicans and sharpening the contrast with Republican rival Mitt Romney on the crucial issues of taxes.
At an event staged in the East Room with working families, Obama announced that he would support a one-year extension for households earning less than $250,000, citing the tough economic times “when so many people are trying to get by.” But the president added that he supports allowing the tax cuts to expire at the end of the year for higher-income earners, putting him at odds with the GOP, which favors extending them for all income levels. [Washington Post, 7/10/12]
Fox Claims Obama's Proposal Could Affect “As Many As Half” Of Small Businesses
Fox's Lou Dobbs: The Fact That Only 3 Percent Of Small Businesses Would Be Affected Is “Specious, False, And Wrong.” Fox Business host Lou Dobbs dismissed the fact that only about 3 percent of American small businesses would be affected by a marginal tax increase on households making more than $250,000 a year:
LOU DOBBS: You go through the number of small businesses, you're talking about as many as half -- as many as half of the small businesses in the country --
MEGYN KELLY [HOST]: [President Obama] says that's not right. He said that you were going to make that argument. He said Lou Dobbs is going to go on Fox News today, and he's going to make this argument. He said you know what my critics are going to say. They're going to say small businesses, small businesses. And he said remember this, 97 percent of small business owners make less than $250,000 a year, so my tax hike's only going to affect 3 percent of small business owners. And I've cut taxes for small businesses 18 times since taking office.
KELLY: So, you don't believe the 97 percent number?
DOBBS: No. It's spurious at best, specious, false, and wrong, if I can put it that way. [Fox News, America Live, 7/9/12]
But Experts Have Said The Proposal Would Only Affect A Tiny Fraction Of Small Businesses
Joint Committee On Taxation: “Three Percent Of All Taxpayers With Net Positive Business Income” Would See A Marginal Rate Increase. A July 12, 2010, analysis of Obama's FY2011 Budget Proposals -- which also called for the expiration of the Bush-era tax cuts for those making more than $250,000 -- by the Joint Committee on Taxation (JCT) stated that “three percent of all taxpayers with net positive business income” would see higher taxes under Obama's plan, adding that "[t]hese figures for net positive business income do not imply that all of the income is from entities that might be considered 'small.' ":
The proposal provides tax relief to a large percentage of taxpayers, which will provide incentives for these taxpayers to work, to save, and to invest and, thereby, will have a positive effect on the long-term health of the economy. The proposal also results in increased marginal tax rates on upper income taxpayers (as is provided for by the present-law sunset of EGTRRA), which will correspondingly reduce incentives for these taxpayers to work, to save, and to invest. Opponents of this latter aspect of the proposal often note that many small businesses, and a large fraction of small business income, will be adversely impacted by an increase in the top two tax rates. The staff of the Joint Committee on Taxation estimates that in 2011 just under 750,000 taxpayers with net positive business income (three 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 50 percent of the approximately $1 trillion of aggregate net positive business income will be reported on returns that have a marginal rate of 36 or 39.6 percent. These figures for net positive business income do not imply that all of the income is from entities that might be considered “small.” For example, in 2005, 12,862 S corporations and 6,658 partnerships had receipts of more than $50 million. [Joint Committee on Taxation, 7/14/10]
Tax Policy Center: Only 1.5 Percent Of Tax Filers Reporting Business Income Were In Top Two Tax Brackets. Data from the Tax Policy Center show that in 2007, only 1.5 percent of tax filers that reported business income were in the top two tax brackets, the same brackets that would be affected by the expiring tax cuts. [Tax Policy Center, 4/27/07]
Center On Budget And Policy Priorities: “Only 2.5 Percent Of Small Business Owners Who Are Taxed At The Individual Rate ... Are In The Top Two Income-Tax Brackets.” Citing a recent Treasury report, the Center on Budget and Policy Priorities found that very few small business owners are taxed in the top two tax brackets:
The claim that raising marginal tax rates at the top of the income distribution would severely harm small businesses has little empirical basis. Few small business owners pay taxes at the top rates. According to a recent Treasury analysis, only 2.5 percent of small business owners who are taxed at the individual rather than corporate rates are in the top two income-tax brackets.
Further, claims that about half of “pass-through” business income (i.e., income that firms pass through to their owners, who pay income taxes on these profits) is taxed at the top two tax rates  are also misleading. These claims rely on an extremely broad definition of “business” that treats any filer with any business income as a business owner. Under that definition, professors who occasionally get paid for giving a speech or doing some consulting on the side, lawyers and accountants whose firms are organized as partnerships, and corporate executives who get paid to sit on other firms' boards of directors are treated as small business owners. [Center on Budget and Policy Priorities, 4/24/12]
Economist Dean Baker: Even For The Small Percentage Of Affected Small Businesses, The Increase In Taxes “Would Be Trivial.” Center for Economic and Policy Research co-director Dean Baker pointed out that the proposal is a marginal tax rate change, meaning the first $250,000 of income, no matter how high that income is, will not be affected:
Furthermore, even for the most businesses that did pay a higher tax the increase would be trivial.
This is because the tax is a marginal tax. A business owner who earned $300,000 a year, enough to be subject to a higher tax under the Obama plan, would see her taxes increase by approximately 0.5 percent of her income. [Center for Economic and Policy Research, Beat The Press, 7/10/12]
And Experts Have Said That Taxpayers With Business Income Are Not Necessarily “Small” Businesses
Tax Foundation Economist: “Nobody Can Agree What A Small Business Is.” In a Reuters article on Obama's proposal, economist Will McBride at the conservative-leaning Tax Foundation highlighted the ambiguity regarding what is or isn't a small business while discussing the proposed changes:
“Nobody can agree what a small business is,” said Will McBride, an economist at the conservative-leaning Tax Foundation, which backs lower taxes for all business.
Nearly every Republican lawmaker who blasted Obama's pitch used the term “small business” to brand it a disaster.
“Small businesses who are struggling to make payroll and working families who have tightened their belts to meet their budgets cannot afford to be hit with a massive tax increase come January,” Republican House Majority Leader Eric Cantor said.
Democrats say that line of attack is misleading, pointing out that 97 percent of small businesses would not be hit, according to nonpartisan congressional estimates.
Also, mega law firms and hedge funds are part of that category - not exactly sympathetic figures for Republicans looking to portray Obama as a job killer ahead of the November 6 election. [Reuters, 7/9/12]
Former Bush Economist: It's A “Fallacy” To Call All Affected Businesses “Small Businesses.” A September 17, 2010, Washington Post article stated, “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.” From the Post:
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 Post, 9/17/10]
CBPP: Much “Business Income” Does Not Go To “What Most Americans Think Of When They Hear The Term 'Small Business.' ” In an August 3, 2010, report on the effects of an extension of the Bush-era tax cuts for high-income earners, the Center on Budget and Policy Priorities stated:
While conceding that this would benefit only a tiny share of people with business income, some proponents of extending the high-income tax cuts argue that Congress should extend the tax cuts anyway because this relatively small group of people receives a large proportion of the nation's business income. While true, this fact reflects the reality that large amounts of “business income” go to concerns like large corporate law practices, accounting firms, and wealthy people who invest in financial and real estate partnerships. These are not what most Americans think of when they hear the term “small business.” [Center on Budget and Policy Priorities, 8/3/10]