Pat Garofalo is the economics researcher and blogger for WonkRoom.org at the Center for American Progress Action Fund.
With jobs and the economy consistently polling as the top issues concerning Americans today, both parties in Congress are trying to cast themselves as the defenders of small businesses—those famous engines of American job creation. And this quest to claim the title of small businesses' staunchest ally is especially urgent due to the scheduled expiration of the 2001 and 2003 Bush tax cuts at the end of this year.
If Congress does nothing, all of the Bush tax cuts will disappear, essentially sending the tax code back to where it was under President Clinton. President Obama and most congressional Democrats embrace a plan to extend the tax cuts for lower- and middle class Americans while allowing those for the richest two percent of Americans to expire. Republicans, however, want to permanently extend the entire package of cuts.
To gain some perspective, those 2 percent of American households that file in either of the top two income tax brackets—the brackets that would increase under Obama's plan—make an average of $800,000 annually. Extending those tax cuts for the richest 2 percent would cost $830 billion over 10 years, with all the benefits going to this tiny, wealthy segment of our society.
In order to justify their desire to spend hundreds of billions of dollars on the already very well-off, Republicans claim they are defending small businesses from a tax increase. "To those who are pushing the higher marginal rates, I say the burden is on you to show that you are not harming our primary job creators, small business," says Republican Sen. Chuck Grassley of Iowa. "This is about stopping a job-killing tax hike on small businesses during tough economic times," adds Utah GOP Sen. Orrin Hatch.
Well now. According to the Center on Budget and Policy Priorities, a nonpartisan think tank in Washington, fewer than 2 percent of small businesses make enough to file in the top two income tax brackets. Far more, 14 percent, claim the Earned Income Tax Credit, which is only available to low-income workers. In fact, less than 3 percent of people with any business income at all—from an enterprise large or small—would be affected if the rates on the top two tax brackets increase, according to the Congressional Joint Committee on Taxation.
Republicans also are fond of claiming that 50 percent of small business income claimed on personal tax returns is subject to the top two tax rates. Says Senate Minority Leader Mitch McConnell of Kentucky anytime he gets the chance: "What they propose to do is raise taxes on the top two rates, which would capture about 50 percent of small business income."
Not only is this untrue, it is largely beside the point. While half of all net business income claimed on personal returns is subjected to the top two tax rates, this includes an array of money that in no way resembles earnings from a small business. Counting it all as small business income is to suggest that every partner in a law firm, everyone earning money from a hedge fund investment, and every passive investor in an oil or gas venture is an individual small business. Making money from investing in real estate or a trust fund? Congratulations--to a Republican, you're a small business!
In fact, using the GOP metric, the $84 that President Bush made from passive oil investments in 2001 made him a small business owner. Should we be counting on this kind of investment by the former president to create the massive number of jobs needed to counteract the effects of the Great Recession?
The fact is, exceedingly few small businesses are subject to the highest tax rates. Plus, at the end of the day, the income tax is levied on just that—income, not profits—so small business owners taking home $1 million per year ought to be taxed like anybody else making that much if they chose to report their small business earnings as income.