Are The ‘Small Businesses’ Republicans Claim To Be Protecting From A Tax Increase Really Small?

When the prospect of the Bush tax cuts for the wealthy expiring on schedule is raised with Republicans, they almost inevitably claim that the expiration will disproportionately affect small businesses. Point out that fewer than two percent of small businesses make enough money to be affected if the top two income tax brackets increase, and the GOP consistently replies that the increase would hit half of small business income.

“What they propose to do is raise taxes on the top two rates, which would capture about fifty percent of small business income,” said Senate Minority Leader Mitch McConnell (R-KY). “We know that roughly half of [small business income] will be affected by the top two rates, and then you start guessing, ’cause we don’t really know, how many employees are under that,” said American Action Forum President Douglas Holtz-Eakin.

As we’ve noted before, this is a selective reading of the data, as half of net business income claimed on personal returns would be affected, which does not mean that it is all from businesses that are small. In fact, this income is largely consolidated in the hands of very wealthy individuals, some of whom are using the personal income tax system to duck the U.S. corporate tax. Here’s a closer look at some of these “small businesses” (which are mostly S corporations or partnerships):

— As Citizens for Tax Justice pointed out, Bechtel Corp., the largest engineering firm in the country, is an S corporation, and thus its owners file their income from the company on their personal tax returns. It is the fifth-largest privately owned company in the U.S. and had gross revenue in 2008 of $31.4 billion.

— The Tribune Company — the country’s second largest publisher of newspapers, including the Chicago Tribune and the Los Angeles Times — is also an S corporation. It actually saved $1.8 billion in taxes by not filing as a corporation.

— The average gross adjusted income of someone who receives more than half of their income from an S corporation and will be affected by the expiration of the Bush tax cuts for the wealthy will be $1.1 million next year.

Also included in this pile of business income will be income earned by doctors, lawyers, hedge fund partners, corporate CEO’s that receive a speaking fee on the side, people earning book royalties, and those (like former President George W. Bush) who have passive investments in large companies that they in no way influence on a daily basis.

I spoke with Steve Wamhoff, Legislative Director of Citizens for Tax Justice, who explained that, when it comes to S corporations, 59 percent of earnings are going to the richest 2 percent (who claim more than $10 million in S corp income). Meanwhile, 80 percent of the earnings from partnerships are going to the top 1 percent (which also have receipts of more than $10 million). So, he explained “the vast majority of the receipts [for these types of businesses] are going to a very small number of entities that have receipts over $10 million.”

House Minority Leader John Boehner (R-OH) conceded yesterday that fewer than three percent of people with any business income would be affected if the Bush tax cuts for the wealthy expire. “Obviously, the top three percent have half of the gross income,” he said. “And this is why you don’t want to punish these people at a time when you have a weak economy.”

But these are people who are doing exceedingly well (and in some cases are using the personal income tax system to duck corporate taxes). It’s not worth spending $830 billion to prevent their tax rates from going back to where they were in the 1990’s.