SUMMARY: There’s a lot of debate over who’s middle class, and what’s a small business. But tax experts say that approximately 97 percent of small businesses won’t be affected by the cuts. That’s partly because -– contrary to what Rogers says –- most small business owners pay tax only on the money they have left after they pay overhead and salaries.
ANALYSIS: Rogers’ column implies that a small business owner with $250,000 in annual receipts -– not a huge intake for an entire business –- would be penalized if the tax cuts on higher-income earners were allowed to expire. But it doesn’t work that way.
Most small business owners structure their enterprises as limited liability companies or “S corporations,” said Samuel Addy, director of the University of Alabama’s Center for Economic and Business Research. Those structures allow the business to stand as a separate legal entity –- while profits from the business go to the business owner as personal income.
So a business owner who brings in $250,000 per year would pay overhead and salaries and then would pay an income tax on what’s left over -– an amount that would likely be substantially less than $250,000.
“You are taxed not on the gross, but on the net,” Addy said.
And most small businesses don’t net more than $250,000. According to the Tax Policy Center -– a nonprofit policy organization run by an advisory board that includes tax advisors from the Clinton and Reagan administrations -– a little less than 3 percent of LLCs, partnerships and S corporations earn more than $250,000 in taxable income.
But people seem to have a distorted idea about what their neighbors are making, and how they’re taxed, said Benjamin Harris, a senior research associate with the Brookings Institution, which is a partner in the center.
“This is a confusing aspect of the tax code for a lot of people,” said Harris. “It’s very similar to the situation with ‘Joe the Plumber.’”
That confusion may be a result of the multiple meanings of the word “small business.”
“Most people think of the small business as the corner store, with 10 or 15 employees,” Harris said. “But the definition of a small business is a difficult, squishy, frustrating thing.”
The federal Small Business Administration extends “small business” status to some fairly large enterprises. According to the SBA, an independent tire plant with 1,000 employees can be a small business. So can a credit card company with less than $175 million in holdings, or a newspaper with up to 500 workers.
So which small businesses are the real drivers of job growth –- the roughly 97 percent below the $250,000, or the roughly 3 percent above that mark? According to Addy, that’s not really the right question, because it’s based on the popular notion that small businesses are the nation’s biggest job generators.
“That’s true, but when people say that, they’re not taking into account the dynamic element,” Addy said.
Addy noted that, almost by definition, the biggest job-generating companies are businesses that are growing. So this year’s job-generating small-business dynamo will become next year’s big business.
Donald Marron, director of the Tax Policy Center, agrees.
“The firms that create the jobs are young, growing firms,” he said. “If I own one dry cleaning store and employ five people, I’m not creating as many jobs.”
BamaFactCheck.com asked Rogers’ press secretary, Shea Snider, for an explanation of how the congressman arrived at his claim about business owners making $250,000 per year. Rogers’ office responded by forwarding a GOP position statement called “Democrats’ Ticking Tax Bomb, Part V.” You can read the piece at: http://bit.ly/9Iof5m.
It’s important to note that the document was written in August, and some of the provisions mentioned in the document are not part of the current compromise tax proposal. (Most significantly, the Obama administration has yielded to the GOP on the “expensing” issues mentioned in the piece.)
In case you’re wondering, Samuel Addy isn’t an opponent of extending the tax cuts.
“I agree with Rogers’ position,” Addy said. “But I think his example undercuts the argument he’s trying to make.”
Addy said that while the government is trying to stimulate growth, it makes sense to go ahead and leave the tax cuts in place, just in case it will help –- though Addy said the impact isn’t likely to be significant.
The Tax Policy Center’s Marron agreed that restoring the old tax rate would affect small business growth, though he said that effect would likely be slight.
“I wouldn’t go all the way down to zero on the effect,” Marron said. “But in general a lot of the rhetoric is overstated.”