Deconstructing conservative media's misleading claims about tax increases for small businesses

As we get closer to the expiration of President Bush's tax cuts, the conservative media is working overtime confuse the public into swallowing yet another round of tax cuts for the rich. Their excuse du jour? If we don't extend the tax cuts, non-rich small business owners everywhere will suffer, ending job growth. But the reality couldn't be more clear: as a Tax Policy Center recently demonstrated, the vast majority of small businesses will not be affected by Obama's proposal to let the Bush tax cuts expire for those making over $200,000.

Take Rush Limbaugh, who claimed on July 27 that "most small business profits pay taxes in households making more than $200,000 a year ... A 40 percent tax increase and [President Obama is] out there today talking about how we got to get money into the hands of small businesses."

And Karl Rove, who's turned spinning the Bush tax cuts into good news for the poor into something of a hobby recently, further advanced the narrative, saying letting the tax cuts expire for those making over $200,000 would "be affecting a lot of small businesses," adding that "50 percent of all the income received by small businesses will be taxed at a higher rate" if Bush's tax cuts for the rich expire. He also stated that the proposal would be "killing the incubator of new jobs in America."

Most "profits pay taxes" in the highest tax brackets? "Fifty percent of all income" will be affected? Limbaugh and Rove are working overtime here to try and convince people that "most" small businesses will be affected by letting these tax cuts expire, without actually saying it. So, why aren't they saying it outright?

Because it's not even a little bit true. As the non-partisan Tax Policy Center (TPC) noted Wednesday: "[N]ext year about 36 million taxpayers will report income" using the returns most small businesses use to report income, but "Only about 900,000, or 2.5 percent, would pay higher rates if the Bush tax cuts were allowed to expire for those in the top brackets."

The TPC went on to note that while that 2.5 percent did very well, earning "almost 44 percent of all the business income included in individual returns," the "average positive business income reported on 1040s is less than $40,000," a far cry from the $200,000 it would take for the business income to be taxed at higher rates under Obama's plan.

Three percent, it should be noted, is much less than 50 percent, and does not qualify as "most."

That's not to say that some people reporting business income wouldn't face higher taxes, it's just that those people are very wealthy, and are not necessarily engaged in the sorts of careers most of us think of as "small businesses":

On the other hand, some reporting business income would face higher taxes if the top rates returned to their pre-2001 levels of 36 percent and 39.6 percent, up from today's 33 percent and 35 percent. Ninety percent of high-earners who receive business income will get at least half of their AGI from this source in 2011. A half million top-bracket filers will report net positive business income averaging more than $700,000. These are the people--not the mom-and-pop business owners-- who would be hit by the expiration of the top bracket tax cuts. 

Who are they? Many are doctors, lawyers, and investors. Others are very successful entrepreneurs who may own a chain of grocery stores or dry cleaners, or a lot of real estate. Do they fit your image of a small business owner? That, I suppose, is in the eye of the beholder.

Further, contrary to Rove's suggestion that letting the tax cuts expire for the small percentage of people reporting business income who are wealthy enough to see their taxes increase would be "killing the incubator of new jobs," The TPC noted that some research suggests those increases may actually encourage the growth of small businesses:

And now to the bottom line: Would raising their taxes be a job-killer? That is less clear. Some research suggests that higher tax rates actually encourage small business formation. Why?  Because these firms allow their owners to shelter lots of income, behavior that is more lucrative when rates are higher. Other research suggests that higher rates do retard investment and hiring by existing firms. Donald Bruce and Tami Gurley-Calvez, who study small business for the Hudson Institute, have written a nice review of all these issues. 

While we are not certain about what higher taxes will mean for small business, we know these firms will suffer if they are unable to access capital. And to the degree that ever-greater government borrowing makes it harder for these firms to raise money, they and their employees will pay a price. That is the other consequence of keeping taxes low for high earners, which will cost nearly $700 billion over the next decade.   

Wow, it's almost as if the right-wing media are trying to confuse the issue on purpose...