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How tax facts stack up in small-business imbroglio

The Associated Press

WASHINGTON — Newly empowered Republicans say President Obama would subject as much as half the nation’s small-business income to job-withering tax increases. Obama and his Democratic allies argue that allowing taxes to rise on the wealthiest Americans would affect only a handful of small-business owners.

Both can’t be right. And both are playing number games as the lame-duck Congress prepares to take up one of the most contentious issues of the post-election season: what to do about an array of Bush-era tax cuts that are about to expire. If Congress fails to act, taxes will go up Jan. 1 for essentially every American taxpayer.

Neither party wants that to happen. Hoping to avoid a December train wreck, Obama has hinted at a possible compromise — perhaps extending the tax cuts for everybody for a year or two. But so far, the president and the Republicans, flush from their big midterm election gains, haven’t been able to bridge their differences.

The Obama White House argues that the Bush tax cuts should be extended for everybody earning less than $200,000 and for couples earning less than $250,000 a year. Supporters claim the move would protect middle-class taxpayers while helping to rein in budget deficits.

Republicans and a growing number of rank-and-file Democrats argue that, despite rising voter angst over deficits, now is no time to raise taxes on anybody — not with unemployment stuck near 10 percent, the housing market still in a shambles and overall economic growth anemic.

They insist the move would increase taxes for hundreds of thousands of small- and moderate-sized businesses whose proceeds are taxed at individual rather than corporate rates.

The Bush tax cuts will be a major topic when the president meets today at the White House with Republican and Democratic congressional leaders.

Here’s a closer look at the rival claims:

THE CLAIM: Obama and his Democratic allies insist that the vast majority of small businesses — or about 97 percent — would be unaffected under his plan. They note that just 3 percent of those reporting business income on their tax returns earn more than the $200,000 and $250,000 thresholds for tax hikes. And they say allowing taxes to rise for the wealthiest Americans would save taxpayers $700 billion over 10 years.

THE FACTS: The 3 percent figure is statistically correct, but misleading. That’s because the overwhelming number of small businesses are very small, even tiny. And there are a lot of them — for instance, a house cleaner, a dog walker, an ice cream vendor, somebody who makes money selling things on eBay.

The Internal Revenue Service doesn’t distinguish between small homegrown businesses and far less common but extremely profitable ventures such as some hedge funds and doctor and lawyer partnerships.

That distorts the overall percentages to make it appear the impact of the White House plan on small businesses is extremely limited. In fact, it would affect about 750,000 taxpayers who report business profits on individual income returns, according to the congressional Joint Committee on Taxation.

Bill Rys, tax counsel for the National Federation of Independent Business, said roughly 75 percent of small businesses pay their business tax at the individual level.

“For small business owners especially, they’re really struggling to get out of this recession,” Rys said. “The businesses that are likely to be impacted by tax increases are ones that are employing workers.”

As to costs, while extending tax cuts to the wealthiest Americans would cost an additional $700 billion over 10 years, extending them just for lower- and middle-class Americans as Obama wants would cost more than $3 trillion over the same period.

THE CLAIM: Many Republicans say letting the Bush tax cuts expire for upper-income earners will have a widespread negative impact on small businesses. The increase would affect half of small-business income, says Senate Minority Leader Mitch McConnell of Kentucky. Sen. Orrin Hatch of Utah calls it “a job-killing tax on small business during tough economic times.”

THE FACTS: McConnell focuses on affected business income rather than the 3 percent of individual business owners cited by Democrats. The Joint Committee on Taxation agrees, saying that taxpayers whose taxes would increase account for half the business income reported on individual returns. However, two-thirds of these 750,000 households have average net incomes of about $700,000, the committee says. And some have earnings as high as $50 million, including some of the nation’s largest privately held professional firms — hardly “small” business.

THE CLAIM: Republicans and Democrats alike call small business the nation’s prime engine of job creation. Politicians, including Obama, like to say that small businesses create two out of every three new jobs.

THE FACTS: That depends on how you define “small” business.

The Small Business Administration defines a small business as one with fewer than 500 employees. By that gauge, more than 99 percent of the nation’s roughly 6 million businesses with employees qualify.

While smaller businesses do a lot of hiring, they also do a lot of firing. “There’s less turnover at large companies,” said Jim Nunns, senior fellow at the nonpartisan Tax Policy Center, a joint venture of the Brookings Institution and the Urban Institute. At the height of the recession, the largest number of overall job losses occurred in businesses with fewer than 50 workers.

Mark Zandi, chief economist at Moody’s Analytics, said Obama’s plan to let taxes increase on top earners “will have an impact on small business, but not nearly to the degree that some fear.”

But, he added, “why take a chance when the recovery is so fragile• I think small businesses are very important to the job machine. Without them, the job machine can function, but it can’t function well.”


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