Fox News' Perino misleads on Medicare tax impact on small businesses

Perino claimed "small business owners" are "the people who make" over $200,000

Perino: Medicare investment tax on wealthy is "so disturbing" because "the people who make that money are the small business owners." From the March 19 edition of Fox News' Fox & Friends:

PERINO: One of the most disturbing things to me is a 3.8 percent tax on unearned income, so that's all your investment income, if you make over $200,000 a year. The reason that's so disturbing is because the people who make that money are the small business owners, and they're the ones who create the jobs. And so this will feel like, as I've said, a lead-blanket on economic growth and then supposedly the administration's next priority is going to be increasing jobs in the states.

In fact, fewer than 1.3 percent of small businesses make enough to be affected by the tax

Medicare investment tax does not apply to those earning less than $200,000. The House Rules Committee's section-by-section analysis of the health care reconciliation act states that the 3.8 percent Medicare tax on investment income -- which takes effect in 2013 -- "does not apply if modified adjusted gross income is less than $250,000 in the case of a joint return, or $200,000 in the case of a single return":

Sec. 1402.  Medicare tax.  Modifies the tax to include net investment income in the taxable base.  Currently, the Medicare tax does not apply to net investment income.    The Medicare tax on net investment income does not apply if modified adjusted gross income is less than $250,000 in the case of a joint return, or $200,000 in the case of a single return.  Net investment income is interest, dividends, royalties, rents, gross income from a trade or business involving passive activities, and net gain from disposition of property (other than property held in a trade or business).  Net investment income is reduced by properly allocable deductions to such income. 

Fewer than 1.3 percent of those who claim small business income would be affected by Medicare investment tax. Despite Perino's claim that "small business owners" are "the people who make" over $200,000 and would therefore be affected by the Medicare investment tax, according to the Tax Policy Center's table of 2009 tax returns, 457,000 of the 36,064,000 returns that reported small-business income -- or 1.3 percent of them -- were in the top two income tax brackets, which include all filers with taxable incomes high enough to trigger the investment tax in the health care reform bill.

TPC: "[N]ot everyone who receives small business income should be classified as a small business owner." Ben Harris wrote on the Tax Policy Center's TaxVox blog that "0.5 percent of small business owners both fall into the top two marginal tax rates AND derive more than half their income from a small business." From the April 2009 post, which addressed Obama's proposal to "allow the top two marginal income tax rates to revert to their pre-Bush levels":

Allowing these rates to rise would hurt very few small business owners. In 2009, about 36 million taxpayers have small business income - defined as taxpayers who report a gain or loss on tax schedules C, E, or F. This group includes not only sole proprietorships, S corporations and partnerships, but also taxpayers who receive royalties, rental income, and income from trusts. Of these 36 million small business owners, just 1.3 percent (about 457,000) fall into the top two tax brackets-indicating that approximately 99 percent of small business owners fare better under the President's proposed changes to the statutory tax rates. Estimates by the Treasury Department and Joint Committee on Taxation reach a similar conclusion.  

And not everyone who receives small business income should be classified as a small business owner; most derive the bulk of their income from other sources. TPC estimates show that only about 174,000 taxpayers, or 0.5 percent of small business owners, both fall into the top two marginal tax rates AND derive more than half their income from a small business. This group makes up 0.1 percent of all taxpayers, meaning that the chances of being in this group-a small business owner getting at least half of total income from small businesses and being subject to a tax increase-is about one in a thousand.