Published on November 6, 2012
By Frank Knapp Jr. | Montgomery Advertiser
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, most of whom pay income taxes on their business income through their personal tax returns.
Everyone seems to agree that less than 3 percent of small-business owners with “pass-through” business income (i.e. 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!