A Small Business Tax Hike? The 97 Fallacy

Texas Insider Report: DALLAS Texas President Barack Obama has proposed that most of the tax cuts for households with higher incomes be allowed to expire but has called for the permanent extension of the Bush tax cuts for singles with incomes below $200000 and married couples with incomes below $250000.  The president and his supporters have repeatedly asserted that the expiration of these cuts will have little impact because they affect only a tiny fraction of the wealthiest Americans say Kevin A. Hassett director of economic policy studies and a senior fellow at the American Enterprise Institute and Alan D. Viard a resident scholar at the American Enterprise Institute. House Speaker Nancy Pelosi says the planned tax increases would exempt 98 percent of American families and about 97 percent of small businesses.  However the impact is far more severe than Pelosi leads on.   In fact the sound bite about 3 percent of small businesses is one of the more misleading statements in the long history of economic propaganda say Hassett and Viard.

• The 3 percent figure which is computed from Internal Revenue Service (IRS) data is based on simply counting the number of returns with any pass-through business income.
• So if somebody makes a little money selling products on eBay and reports that income on Schedule C of their tax return they are counted as a small business.
• The fact that there are millions of people in the lower tax brackets with small amounts of business income is irrelevant for the assessment of the economic impact of the tax hikes.

The relevant number is clear say Hassett and Viard.

• According to IRS data fully 48 percent of the net income of sole proprietorships partnerships and S corporations reported on tax returns went to households with incomes above $200000 in 2007.
• Thats the number to look at not the 3 percent.

For those who are determined to tax the rich at all costs the tax hikes may well make sense.  But the evidence is clear that lifting the top rates will hamper the business investment upon which our nations prosperity depends.  That affects all Americans not just 3 percent say Hassett and Viard. Kevin A. Hassett and Alan D. Viard The Small Business Tax Hike and the 97 Fallacy Wall Street Journal September 3 2010.