Tuesday, October 07, 2008

Tax Cuts and Small Business

The next time you hear John McCain talk about extending the Bush "tax cuts" in order to help small businesses - it's useful to know what he means by a "small business".

The following information is from the Center on Budget and Policy Priorities article "The 2001 and 2003 Tax Cuts and Small Business" by Robert Greenstein
"Small business" is meant to invoke visions of, risk-taking entrepreneurs who are involved in the hands-on management of their small firms. To some people, it calls to mind the corner grocery store owner or the local auto mechanic. To others, it suggests a start-up firm, such as a new business developing a new type of software."

"The tax cuts have indeed provided significant tax breaks to a small, elite group of households with some small-business income. But for the vast majority of such households, the tax cuts offer far more limited benefits, and the reductions in the top income tax rates offer no benefits at all."

"The Administration’s estimates count as a small business owner any tax unit that includes any income (or loss) from a sole proprietorship, farm proprietorship, partnership, S corporation, or rental income."

"This expansive definition suffers from two problems. First, it counts as tax cuts for small businesses billions of dollars in tax benefits that go to individuals whose businesses are not “small.” Second, it counts as tax cuts for small businesses tax benefits that go to wealthy individuals who are passive investors and have nothing to do with operating the business in question (and may never have set foot in it)."

"Using IRS data from 2003, the Joint Tax Committee showed that the Treasury definition of “small business” included 770,000 businesses with gross receipts of over $1 million and 86,000 companies with gross receipts of over $10 million. Businesses with gross receipts of more than $10 million accounted for about two thirds of the gross receipts of all partnerships and S corporations."

"The Treasury definition includes many wealthy individuals who are passive investors, not small-business proprietors. According to the Tax Policy Center, passive income from partnerships and S corporations accounted for some or all of the small-business income of 2.9 million tax filers who were termed “small-business owners” under the Treasury definition in 2004. For 850,000 of these filers, all of their “business income” came in this passive form."

"It is of particular note that the prevalence of passive business income increases at higher income levels. Passive investment income constituted all or part of the business income of about 9 percent of all households counted as small business owners under the Treasury definition. But about 35 percent of the “small-business owners” with incomes above $200,000, and about 58 percent of the “small-business owners” with incomes over $1 million, received some or all of their “business income” in this form."

"Small businesses typically evoke positive images in the public mind, and the Administration and other supporters of the 2001 and 2003 tax cuts have often sought to build support for these tax cuts by associating them with the small-business sector. Yet the benefits tax-cut supporters claim will flow to small businesses as a result of the tax cuts are greatly exaggerated. Few small businesses will see any benefit at all from the reduction in the top income-tax rates. Moreover, the distribution of the tax cuts as a whole among small businesses closely resembles their distribution among other households: by far the largest benefits flow to those with the highest incomes."
The Republican party's tax cuts as implemented by George W. Bush and now championed by John McCain place the burden on middle class taxpayers, while giving tax breaks to the ultra rich - many of whom have nothing to do with producing goods or services or employing people.