A Community Organizer’s Business Insights

President Obama offers an irrelevant, misleading statistic to justify his politically motivated call for a tax increase on small business employers

The White House notified us that the President would make a major announcement regarding taxes.  All of America was interested because due to political malfeasance the Bush tax rates, enacted nine years ago are still in legal limbo and will expire triggering increases in every tax bracket rate if Congress does not act by the end of the year.  This would be a good time for a serious, adult proposal.  Sadly, the “major announcement” turned out to be a dreary rerun of vacuous slogans from Obama’s 2008 campaign. 

The President called for tax increases on those earning over $200,000, but not on “middle class families or small businesses.”  He then tried to preempt one of the arguments against tax hikes on the wealthy:

…we know what those who are opposed to letting the high-end tax cuts expire will say.  They’ll say that we can’t tax “job creators.”  And they’ll try to explain how this would be bad for small businesses…

But here’s the thing that you have to remember.  The proposal I make today would extend these tax cuts for 97 percent of all small business owners in America.  In other words, 97 percent of small businesses fall under the $250,000 threshold.  So this isn’t about taxing job creators, this is about helping job creators.  I want to give them relief.  I want to give those 97 percent a sense of permanence.

It’s true that only a small percentage of the total population of small business owners are in the over $200,000 tax bracket.  But that’s an irrelevant and misleading statistic.  And basing tax policy on that statistic can only slow the economic recovery and job creation. 

Obama hopes to mislead the great majority of voters who earn salaries and wages and are not familiar with the way the tax code treats small businesses.  Sole proprietorships, partnerships, LLCs and S corporations  are all required to report business sales, expenses and profits on the personal tax returns of the owners. 

Every taxpayer who reports in any business activity on his tax return, is counted as a small businesses.  Thus, the category, “small businesses” includes tens of millions of one or two person or even part time businesses. Few of these very small businesses will ever hire employees.

The businesses that are in a position to hire additional employees are the “larger” small businesses that generate more revenue and more taxable profits.  These are the businesses in the over-$200,000 tax bracket.  To determine if increasing the top tax bracket rates will affect a significant number of job creating small businesses the relevant questions are:

• What percentage of the taxpayers who earn more than $200,000 are small businesses?
  
• What portion of all small business income is earned by those in over $200,000 bracket?

Fortunately, the IRS provides data to answer these questions.  The charts show the most recent IRS data from 2009 tax returns.  Two thirds of the taxpayers who earned over $200,000 were small business owners, and they earned 70% of all small business profits.

Most of the new jobs in America are provided by these 2.6 million small businesses, who fund expansion and job creation by reinvesting after-tax business profits.

Small business growth is always financed more by reinvesting profits than by borrowing from banks, especially since 2010 when Congress enacted new banking regulations that have become barriers to small business lending.  So, in the current environment it’s hard to conceive of a tax increase that could more directly diminish the ability of successful small businesses to expand and create jobs than Obama’s tax hikes on anyone whose return shows more than $200,000 of income – even if it’s small business income, even if the owner plans to reinvest a large portion.

The notion that somehow “fairness” requires this group to be hit with tax hikes is absurd.  This tiny minority not only provides most of the new jobs in America, they already pay half the income tax.

In 2009, only 2.8% of taxpayers earned over $200,000 but they paid 50.2% of all income tax revenue.

The Bottom Line:

No matter how they try to spin it, no matter what irrelevant statistics they cite, Obama and the Democrats can’t escape the truth: Higher tax rates on “the rich” means higher tax rates on 2.6 million businesses that are the primary job creators in America.  Increasing their tax burden will reduce the number of jobs they are able to create.