Deeper look at tax rate impact

Published November 2, 2012

Charlotte Business Journal

By Frank Knapp Jr.

As someone who advocates for thousands of small businesses, I know they want fact, not spin. Unfortunately too often we hear inaccuracies and misinformation about how government policies affect small businesses. Ending the Bush-era tax cuts for the richest 2 percent of Americans is one policy where small business has been caught up in a whirlwind of spin.

So how would allowing the two top tax rates to return to their pre-2001 levels affect small-business owners?

Everyone seems to agree that less than 3 percent of small-business owners with “pass-through” business income (from partnerships, S corporations and sole proprietorships) would be affected should these tax cuts end.

But supporters of extending the high-income tax cuts then argue that the top tax rates cannot be allowed to return to their pre-Bush levels because, they say, these 3 percent of small businesses employ about half of the workers in small businesses and also account for about half of all pass-through business income. The assumption is then made that changing the tax code for these small-business owners might lead to fewer jobs.

None of this is true.

The report that leads to this false information appears to be a 2010 Congressional Joint Committee on Taxation (JCT) report. That report estimated that in 2011, there would be about “750,000 taxpayers with net positive business income” who would be in the upper two tax brackets, and these 750,000 taxpayers would account for 50 percent of all pass-through business income reported to the IRS.

But the report does not say these 750,000 taxpayers are small-business owners. In fact the report tries very hard to stop this equating of these wealthy taxpayers with small business owners.

JCT said, “These figures for net positive business income do not imply that all of the income is from entities that might be considered ‘small.’ ” To emphasize this point, the JCT report says that in 2005 there were 19,520 S corporations and partnerships that reported pass-through business income of over $50 million each!

Who are these high-income companies and taxpayers who are misconstrued as small businesses and small-business owners? They’re pass-through entities like Bechtel, the Tribune Company, Ernst & Young and PricewaterhouseCoopers — certainly not small businesses in most Americans’ eyes. Neither are other pass-through revenue recipients such as K Street Lobbyists, hedge fund managers, corporate law practices, accounting firms and wealthy people who invest in financial and real estate partnerships.

Those in favor of continuing tax cuts for the nation’s wealthiest know there would be little public support for their position if the face of those extensions were professional partnerships of lawyers, accountants, big businesses, and billionaire owners of enormous family enterprises. That’s why it is attractive to instead spin a story about America’s small-business owners as victims should the tax cuts at the top expire.

Small businesses are tired of being told how much they’re admired while at the same time being abused in the political process. While a few of us small-business owners might be considered wealthy, the vast majority of us will not be negatively impacted by allowing the tax cuts on the top two income tax brackets to expire. And, by the way, all of us will continue making hiring decisions based on consumer demand, not our personal income tax rates.

Frank Knapp Jr. is president and CEO of the South Carolina Small Business Chamber of Commerce and Vice Chair of the American Sustainable Business Council Action Fund.

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