The Facts About Small Business and the Bush Tax Cut

There's a lot of rhetoric out there about the Bush tax cuts and their impact on small business. The White House wants to raise taxes back to their year-2000 level for the top two percent of earners, but some Republicans have said this could cripple fledgling companies.

Here are two such accusations. Last week, conservative pundit Stephen Hayward told This Week that "most" of the people affected would be small business owners. Rep. Paul Ryan went even further on Hardball, saying "75 percent of those who will get hit with these higher tax rates are successful small businesses."

These are slightly confusing statements. Are the upper brackets really bursting forth with sandwich shops and boutique IT firms? Let's work through the issue like an FAQ.

First: how many people report small business income?

About 36 million people reported "small business" income in 2009, or 24 percent of all tax filers.*

Wait, does that mean 24 percent of Americans own a small business?

Nope. Receiving small business income isn't the same as owning a small business, and only about 6 percent of the country declares at least half of its income from small business.

Also, "small business" doesn't only mean owning your own dry cleaner or donuts shop. That money could come from part-time consulting, public speaking, building wood tchotchkes and selling them on the side, or belonging to a small partnership, like a law firm or medical practice.

Let's focus on this diverse world of folks declaring "small business income." How many would pay higher rates under Obama's plan?

2.5 percent. That's from TPC's Howard Gleckman, and he's looking here, at TPC's tax projections for 2011.

(Wonky sidebar: 7 percent of those who would declare small biz income earned more than $250K in 2009. So why are only 2 percent affected by the Obama tax increase? Some of those people would be affected by the AMT patch and not see a hike, TPC's Bob Williams told me.)

Now let's dig into the talking point: what percent of those affected by the Obama tax increase declare "small business income"?

Sixty-six percent of the $250K-plus group reported small business income greater than one dollar. But that's not a particularly accurate gauge of business ownership, is it? The real question is...

What percent of those affected by the Obama tax increase are likely to be small business owners?

We can't determine ownership from a tax chart. Instead, we can count the people who make more than half their money from small business and use that as an approximation for ownership. The answer there: 30 percent. Thirty percent of units paying higher taxes because of Obama in 2011 make more than half their money from small business. (To get that number, I looked at both the 36 and 39.6 percent brackets.)

You're telling me that nearly a third of the people affected by the tax hike will be small business owners?

Well, no. I can't tell you that for sure. As Williams explained to me repeatedly, small business income isn't synonymous with small business ownership. Besides consulting and speaking and other side projects filed under small biz income, money drawn from a trust fund can show up in Schedule E. In short, it's very difficult to determine small business ownership from the tax code.

So basically, you're saying there are no easy talking points here. Thanks for nothing.

You're welcome. Just remember this. Liberals can say that two percent of small businesses are in the affected brackets, and they're sorta telling the truth. Conservatives can say that two-thirds of people making more than $250K in 2009 were small businesses, and they're also sorta telling the truth. But there's a huge difference between small business income and small business owners.

Further complicating things is the fact that taxes have ripples. Beyond the question of small business owners, there's the issue of small business payrolls. What happens when an small biz executive on the brink of profit gets hit with a tax increase? Alas, a tax chart can only answer so many questions.

*What does it mean to declare small business income?
Most small businesses report their income on their tax returns on Schedule C (for self-employment or sole proprietorship), Schedule E (for S corporations with no more than 100 shareholders) or schedule F (for farms).

Derek Thompson is a staff writer at The Atlantic, where he writes about economics, technology, and the media. He is the author of Hit Makers and the host of the podcast Crazy/Genius.

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