Friday, July 20, 2012

Top 2% Not Job Creators Or Millionaires In Tax Debate

(On going discussion in Congress right now. mj)
By Richard Rubin - Jul 20, 2012 12:00 PM ET
President Barack Obama describes them as “millionaires and billionaires” who can afford to pay higher taxes. Republicans call them “job creators” who need to keep their money so they can hire more workers.

As the Democratic president and his Republican opponents debate whether to extend the George W. Bush-era tax cuts for the top 2 percent of U.S. taxpayers -- individuals earning more than $200,000 a year and married couples making more than $250,000 -- their poll-tested phrases obscure the truth about who would be affected.

Senate Majority Leader Sen. Harry Reid with Sen. Charles Schumer during a news conference on July 12, 2012 to discuss the Senate’s upcoming vote on the Small Business Jobs and Tax Relief Act. (Photographer: Alex Wong/Getty Images )

S Corporations
Much of the debate in Washington over income tax cuts centers on whether the higher taxes would affect small businesses. Companies structured as S corporations, partnerships or sole proprietorships don’t have to pay the corporate tax of up to 35 percent. Instead, business owners report profits on their individual tax returns, and those are known as pass- through or flow-through businesses.

Each side has its own favorite statistics on the subject, which are accurate and incomplete. Obama and congressional Democrats like to mention that 97 percent of small businesses wouldn’t be affected by tax increases, because they’re not in the top two tax brackets.

That’s true and misleading, Republicans counter. They note that 53 percent of business income reported on individual income tax returns is earned by taxpayers who would be affected by Obama’s proposal. Republican presidential candidate Mitt Romney at campaign events emphasizes the theme that Obama’s plan would hurt business owners.

Dreams ‘Crushed’
“Dreams are being crushed when taxes go up, and up, and up on job creators, and business creators, when regulations become overwhelming and burdensome, when the people in governments sometimes treat you like you’re the enemy instead of the friend,” he said on July 10 in Grand Junction, Colorado.

Not all of the businesses that pay taxes through their owners’ individual returns are small. The partners in global law and accounting firms, oil pipeline companies and hedge funds all have their business profits flow through to their personal tax returns. Even the small businesses don’t necessarily have employees.

A 2011 Treasury Department analysis attempted to separate large pass-through businesses from smaller ones and to differentiate businesses with workers from those with none.

The study found that, depending on the definition of small business, between 29 percent and 32 percent of small business income is subject to the top two tax rates. Of the taxpayers subject to the top two tax rates, 25 percent are small businesses and employers.

Marginal Rates
Beyond the debate over who would be affected, lawmakers also disagree as to how households and businesses would respond to higher marginal tax rates. Democrats point to economic growth during the 1990s with higher tax rates, while Republicans say a reduction in after-tax rates of return would lead to slower growth.

The economic evidence is mixed, Bakija said. “There would be some reduction of incomes of top earners if we raise their tax rates, but it’s probably going to be modest,” he said. “Anybody who claims to have really convincing evidence that this is going to hurt job creation, there just isn’t such convincing evidence.”

-To contact the reporter on this story: Richard Rubin in Washington at
- To contact the editor responsible for this story: Jodi Schneider at