Political Animal

Blog

October 06, 2011 11:25 AM The myth of a small-business tax hike

By Steve Benen

Not surprisingly, Republicans aren’t pleased with Senate Democrats proposing a 5.6% surtax on millionaires and billionaires. But that’s no excuse to lie.

Rep. Doug Lamborn (R-Colo.), for example, insisted, “There are a lot of so-called millionaires who are small businesses. They’re not a movie star, they’re not a Hollywood actor, they’re the dry cleaner on the corner.”

This is standard GOP rhetoric — we couldn’t possibly ask the very wealthy to pay a little more in taxes, because those poor small businesses with seven- and eight-figure incomes would be unduly harmed.

Republicans say this all the time, but repetition does not improve its accuracy. Kevin Drum helped set the record straight a couple of weeks ago.

Step 1: The biggest part of Obama’s plan is to let the Bush tax cuts for the rich expire. The Brookings Tax Policy Center took a look at this last year and estimated that only 1.9% of small businesses are in the two top brackets that would be affected by repeal of the Bush tax cuts. That’s a little better than the dozen small farms affected by the estate tax, but not by much.

Step 2: About half of that 1.9% aren’t really small business owners at all. They’re high-income investors who get part of their income from investments in small businesses. So we’re down to about 1% of small businesses that would be affected.

Step 3: The top brackets are just that: brackets. When the top rate goes up, it doesn’t affect your entire income, just the portion in the top bracket. So if the top rate goes back up from 35% to 39.6%, it only affects the portion of income above approximately $400,000. A small business owner making $500,000 would see an increase of about $5,000.

Kevin’s analysis was based on the White House plan eyeing tax increases on those making $250,000 or more. As of yesterday, the Democratic plan is eyeing tax increases affecting millionaires and billionaires exclusively, meaning that the number of small businesses affected the Dems’ approach would effectively be zero.

“There are a lot of so-called millionaires who are small businesses”? No serious person could possibly believe such nonsense.

Steve Benen is a contributing writer to the Washington Monthly, joining the publication in August, 2008 as chief blogger for the Washington Monthly blog, Political Animal.

Comments

Post a comment
  • doubtful on October 06, 2011 11:32 AM:

    Easy way to prevent this argument: make a concrete legal distinction between people and corporations.

  • kt on October 06, 2011 11:39 AM:

    Every news article about small business millionaires should remind us how many millionaires serve in Congress.

  • WSP on October 06, 2011 11:39 AM:

    Some of the confusion comes from the term "millionaire." In common parlance, a millionaire is someone whose entire portfolio of assets equals a million bucks. Pension, 401(K), home equity, etc. Small business owners, and other middle class folks who save over their whole lives can meet this definition of "millionaire." But nobody is talking about higher taxes on people who have assembled $1 million in assets across their whole lives. The proposal on offer is a slightly higher marginal rate on people who earn $1 million or more EVERY YEAR. There are damn few of these people, they are NOT small business owners or farmers, and they can well afford to pay marginal rates that are in sum lower than they paid during the Clinton years.

  • Ron Byers on October 06, 2011 11:40 AM:

    Lying is all they have. The thing to remember about Republicans is if it passes the Luntz test a claim is repeated regardless of whether it is true.

  • Vondo on October 06, 2011 11:46 AM:

    When did the definition of "millionaire" go from "someone who has a million dollars" to "someone who makes a million dollars a year"?

    I see WSP has made the same point.

  • c u n d gulag on October 06, 2011 11:47 AM:

    Millionaire Dry Cleaner owners?

    With ONE shop?

    Who knew?!?!

    Ok, WaMo readers, you want starch with that?

  • Quaker in a Basement on October 06, 2011 11:56 AM:

    Tax on business income. Tax on personal income. That's the same thing only if a small business proprietor is filing business income on Schedule C. If that business proprietor is hauling in a million a year and is still filing this way, he or she is an idiot.

  • Ron Byers on October 06, 2011 12:04 PM:

    Republicans like to gloss over the difference between gross income and taxible income. Taxible income is derived by subtracting all sorts of deductions from gross income. In the business setting those deductions include ordinary business expenses--rent, lights, payroll, taxes, supplies, the cost of goods, etc. If some small business owner has more than a million dollars in taxable income after deducting all his ordinary business expenses I don't have any problem with him paying a surtax.

    By the way if he does have taxable income greater than $1,000,000 and is still operating as a Schedule C business he needs a new accountant.

  • jonas on October 06, 2011 12:13 PM:

    Who knew dry cleaning was so lucrative? I was wondering how the immigrant family who runs my corner dry cleaners could afford the two Bentleys they have parked in the back, but now I know it's because they don't have a high tax bill.

    Seriously, if your "dry cleaning" company is *netting* $1 million plus, you're not a small business. You probably are a state-wide, or even regional corporation with hundreds of employees. Or a front for a major drug dealing operation.

  • DenverRight on October 06, 2011 12:25 PM:

    doubtful@11.32: Easy way to prevent this argument: make a concrete legal distinction between people and corporations.

    If you mean distinguish people from small businesses, in order to spare the business a higher tax, I'm not sure that's possible.

    I have learned that small businesses do not file individual income tax returns (they are not "people", YET). Rather, many small business owners (or investors) chose to include their business income as part of their own income, reported as individual rather than as a corporation. I could be wrong on this, I am not an economist or a tax guy.

    So small businesses are definitely intertwined with the various individual tax. As to the numbers affected, the CBO calculated last year that approximately 700,000 small businesses (their owners) would be affected by raising the top marginal rate.

    Also, regarding Step 1. "let the Bush tax cuts for the rich expire." - that passive action by the Democrats is not possible if they want to save the tax cuts for the other 98%, because the 98% extension would require an act of Congress. It's a package deal. They all expire (fine with me), or they are all extended.

    Class warfare - raising taxes only on the top 2% - does have its consequences. Does anyone here really think that those 700,000 businesses will not be impacted by a higher tax rate??? In this economy, good luck with that.

  • bdop4 on October 06, 2011 12:31 PM:

    Yes, small business owners often file their business income on their individual tax returns. They also file all the business EXPENSES and there are damn few of them that have over a million in NET INCOME.

    Truth is, most small business owners funnel as much of their revenues back into the business. A slightly higher income tax actually incentivizes them to keep the money in the business (i.e., CREATING JOBS).

  • SYSPROG on October 06, 2011 12:33 PM:

    I'm sorry but the NEXT argument will be is that Obama is trying to take money away from the Republican campaign by imposing this surtax...everyone KNOWS the small donors give to Obama so this will mean the LARGE donors won't be able to give as much...just watch for it.

  • Tony P. on October 06, 2011 12:44 PM:

    So DenverRight has "learned" that small businesses do not file individual income tax returns. I won't ask how recently; I'll just say better late than never.

    Yes, indeed, DenverRight: "small businesses" DO NOT PAY TAXES. Sole-props, partnerships, S-corps are called "pass-throughs" because they DO NOT PAY TAXES on their profits, but pass them through, UNTAXED, to their owners. The owners report that money as income on their personal Form 1040, just like you report your wage or salary income on Form 1040.

    So here's a question for you: suppose your "dry cleaner" has PERSONAL income of $300K from his "small business", and YOU have a $300K salary from somebody else's "big" business. Should you each pay the same marginal tax rate, or not?

    Since you admit to limited expertise on economics and taxes, let me remind you that your employer paid you with PRE-TAX money, just like your dry-cleaner's employer (his own "small business") paid HIM with pre-tax money. For extra credit, keep in mind that your "employer" could in fact be the "dry cleaner": his personal income is the $300K he has left after deducting the $300K salary he pays you from his dry-cleaning receipts. So again: should you each pay the same marginal rate on your respective $300K incomes, or not?

    If not, why? If the same, what the hell difference does all this "small business" malarkey make?

    --TP

  • Zach W. on October 06, 2011 1:40 PM:

    I knew I should have gone into dry cleaning!

    Doug Lamborn is a disgrace to us in Colorado. He represents the hopelessly conservative Colorado Springs area, so unless he gets caught with a hooker, or something similar, the seat is his until he retires.

    I have to say, it must be nice to be a "conservative" these days, you know with the fact-free living and all. Making stuff up is fun.

  • doubtful on October 06, 2011 2:11 PM:

    DenverRight's argument boils down to 'change isn't possible because that's not the way it's done now.'

    Which simply proves a change is needed. Corporations are not people. If they were, the Mitt Romney is a murderer.

  • digitusmedius on October 06, 2011 2:40 PM:

    "But thatís no excuse to lie."

    When did Republicans ever need one?

  • DenverRight on October 06, 2011 3:15 PM:

    Tony P@12.44, Thanks for the post, your second paragraph was very informative and confirms my thinking. I readily admit that I am not a business or tax expert, your 4th paragraph simply makes my head swim...

    As to your 3rd paragraph, a small-business owner and a corporate bigwig, both making 300K, SHOULD pay the same income tax rate (I never argued otherwise). MY point is that when that rate INCREASES the corporate bigwig sucks it up (no new Mercedes this year), but the small business owner may decide to offset that higher tax by reducing his investment back into the company, or his workforce. Does that make sense? Don't know, you sound like the tax tycoon, but wanna bet it never happens?

    MY POINT was that small businesses (CBO numbers - 700,000) would be included in the group of individual income tax filers in the top 2%. BENEN tried to minimize that impact. But small businesses account for 75-90% of jobs in this country (my recollection). In this economy where we all assume the goal is to BOOST employment, would higher taxes on 700,000 small business owners help or hurt?

    THAT'S WHY WE TALK ABOUT SMALL BUSINESSES (it's not always about the Wall Street criminals or the Fortune 500).

  • paul on October 06, 2011 4:01 PM:

    There *are* a lot of millionaires who are small-business owners or partners, because "small business" is officially defined according to your number of employees (sometimes the limit is 100, sometimes 500, depending on who's doing the stats). So all but the biggest white-shoe law firms are small businesses. Probably every boutique hedge fund in the US is a small business. Every production company in Hollywood that has a few people on staff and a bunch of "independent contractors". And so forth.

    And every bleeping one of them who makes more than a million a year net can stand to pay their fair share.

  • Zach W. on October 06, 2011 6:07 PM:

    @ DenverRight. You honestly believe that a small business owner who makes 300,000 dollars a year would lay off employees because they would have to pay around $3,000 more in taxes? If that is true, we have crossed a line where personal greed outweighs any responsibility to society.

    Maybe your argument would hold water if we were talking about going back to the 90% top marginal rate, but that is not the case. Additionally, if what you claim will happen is true, how did any small business ever survive prior to Bush's tax cuts when rates were higher. I seem to remember a lot of prosperity during those times.

  • Tony P. on October 06, 2011 8:27 PM:

    DenverRight has evidently never filed a Schedule C. That's okay, MOST people never have, because MOST people get paid W-2 wages.

    DenverRight's "recollection" that "75-90%" of people get paid W-2 wages by "small businesses" is of course arithmetically impossible. Even if there are 700,000 "small businesses" in a nation with a workforce of about 150,000,000 the AVERAGE "small business" would be employing around 150 people. The country would be full to overflowing with "dry cleaners".

    But just in case anybody is in danger of falling for DenverRight's plausible-sounding argument that a sole-prop "small businessman" would have LESS incentive to hire an additional worker when the marginal rate on his own PERSONAL income tax RISES, let me point out:

    The "dry cleaner" who spends all day waiting on customers, running the machines, and so forth, and spends all night keeping the books, ordering supplies, and so on, for $300K in his own pocket at the end of the year, has a choice: die of overwork, or hire a clerk/bookkeeper for $50K. That $50K will reduce the dry-cleaner's PERSONAL taxable income by $50K -- his tax bill will go down by whatever his marginal tax rate is. If his personal marginal rate is 30%, he saves $15K on his personal income tax; if it's 40%, he saves $20K. He has MORE incentive to hire the bookkeeper at the higher marginal rate.

    Notice that the dry-cleaner's REASON for hiring the bookkeeper is not the tax savings. Nobody pays $50K to an employee just to save paying $15-20K to the IRS. Nobody sensible, anyhow; nobody who runs a business successful enough to net him $300K. No: the "dry-cleaner" hires the worker because he needs the work done. But his INCENTIVE to hire is in fact BIGGER at a higher marginal rate on his personal income tax.

    --TP

  • DenverRight on October 07, 2011 1:35 AM:

    Tony P.,
    Indeed you are a master of taxes and finance. I would not dispute your logic, it makes sense. New taxes on business owners do not exert a downward force on hiring.

    I guess, in this recession (or any recession) HIGHER TAXES would be an incentive TO HIRE MORE WORKERS! Which is exactly what we need.

  •  
  •  
  •