NCPA - National Center for Policy Analysis

The Small Business Tax Hike and the 97 Percent Fallacy

September 7, 2010

President Barack Obama has called for the permanent extension of the Bush tax cuts for singles with incomes below $200,000 and married couples with incomes below $250,000, but has proposed that most of the tax cuts for households with higher incomes be allowed to expire.  The president and his supporters have repeatedly asserted that the expiration of these cuts will have little impact because they affect only a tiny fraction of the wealthiest Americans, say Kevin A. Hassett, director of economic policy studies and a senior fellow at the American Enterprise Institute and Alan D. Viard, a resident scholar at the American Enterprise Institute

House Speaker Nancy Pelosi says the planned tax increases would exempt "98 percent of American families and about 97 percent of small businesses."  However, the impact is far more severe than Pelosi leads on.  In fact, the sound bite about 3 percent of small businesses is one of the more misleading statements in the long history of economic propaganda, say Hassett and Viard.

  • The 3 percent figure, which is computed from Internal Revenue Service (IRS) data, is based on simply counting the number of returns with any pass-through business income.
  • So, if somebody makes a little money selling products on eBay and reports that income on Schedule C of their tax return, they are counted as a small business.
  • The fact that there are millions of people in the lower tax brackets with small amounts of business income is irrelevant for the assessment of the economic impact of the tax hikes.

The relevant number is clear, say Hassett and Viard.

  • According to IRS data, fully 48 percent of the net income of sole proprietorships, partnerships and S corporations reported on tax returns went to households with incomes above $200,000 in 2007.
  • That's the number to look at, not the 3 percent.

For those who are determined to tax the rich at all costs, the tax hikes may well make sense.  But the evidence is clear that lifting the top rates will hamper the business investment upon which our nation's prosperity depends.  That affects all Americans, not just 3 percent, say Hassett and Viard.

Source: Kevin A. Hassett and Alan D. Viard, "The Small Business Tax Hike and the 97% Fallacy," Wall Street Journal, September 3, 2010.

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