Democrats say only 3 percent of small businesses will pay more in income tax if the top two rates are allowed to rise. Republicans, on the other hand, say the hike will hit 50 percent of small businesses’ income. Who’s right?
Both are. The Joint Committee on Taxation estimates that about 750,000 taxpayers with “net positive business income” will fall under the rates of 36 and 39.6 percent. Those 750,000 represent just 3 percent of all taxpayers that report income in this category. But those 750,000 also generate 50 percent of all income filed by this group.
The real question is, “Should we care about those 750,000?” Donald Marron of Tax Policy Center writes in an e-mail to National Review Online, “It is a mistake to focus on the number of filers. . . . What’s potentially interesting is the amount of economic activity that gets affected. However, you need to keep in mind that some of the income that’s reported . . . isn’t necessarily what you would think of as business income.” For instance, a speaker on the lecture circuit may report income in this category. He may be hardworking, but he’s no entrepreneur.
J. D. Foster of the Heritage Foundation, however, writes in an e-mail, “If you have a real small business, with employees and equipment and such — if you’re at all successful you’re going to report more than $250k in salary for yourself and profits for your business.”
So the hike may hit only some small businesses, but they may be the ones we care most about.