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Earlier this week the Washington Post published an article painting the Administration’s tax plan as one that would burden small business owners with soaring tax payments. In stark contrast, a Post editorial run just two weeks earlier—“The Small Business Myth”—debunked claims that Obama’s plan unfairly targeted business owners. Which Washington Post piece is right?
There are plenty of legitimate reasons to oppose the Administration’s tax agenda — most notably that it fails to raise enough revenue to pay for projected spending, even after the current economic crisis has passed. But the heightened tax burden on small businesses just isn’t one of them. The truth is that the overwhelming majority of small business owners would still face relatively low tax rates under Obama’s plan, just as they do under the current tax code.
The claim that the Obama tax plan would disproportionately hit small businesses centers on the President’s proposal to allow the top two marginal income tax rates to revert to their pre-Bush levels. The Administration wants to continue the lower rates for single earners making under $200,000 and for married couples making less than $250,000. Marginal tax rates for wealthier taxpayers would rise to 36 percent from 33 percent and, for the very richest, to 39.6 percent from 35 percent.
Allowing these rates to rise would hurt very few small business owners. In 2009, about 36 million taxpayers have small business income — defined as taxpayers who report a gain or loss on tax schedules C, E, or F. This group includes not only sole proprietorships, S corporations and partnerships, but also taxpayers who receive royalties, rental income, and income from trusts. Of these 36 million small business owners, just 1.3 percent (about 457,000) fall into the top two tax brackets—indicating that approximately 99 percent of small business owners fare better under the President’s proposed changes to the statutory tax rates. Estimates by the Treasury Department and Joint Committee on Taxation reach a similar conclusion.
And not everyone who receives small business income should be classified as a small business owner; most derive the bulk of their income from other sources. TPC estimates show that only about 174,000 taxpayers, or 0.5 percent of small business owners, both fall into the top two marginal tax rates AND derive more than half their income from a small business. This group makes up 0.1 percent of all taxpayers, meaning that the chances of being in this group—a small business owner getting at least half of total income from small businesses and being subject to a tax increase—is about one in a thousand.
Most taxpayers get a break under the Administration’s tax plan. A small proportion would see their taxes rise. In this sense, small business owners are no different than everyone else.
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