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A Project of The Annenberg Public Policy Center

Boehner’s Big Stretch on Small Business

House Speaker John Boehner claimed that “small-business people” make up more than half of those who would be hit by a tax increase on “millionaires.” Not really. Only 13 percent of those making over $1 million get even as much as one-fourth of that income from small business, according to government tax experts.

Old Exaggerations

Republicans have for years greatly exaggerated the extent to which higher taxes on upper-income individuals would fall on owners of small businesses. And we have repeatedly pointed out the inflated figures they’ve used in the past.

This time, Boehner was responding specifically to a question about a “millionaires” tax. The exchange was on ABC’s “This Week” on Nov. 6.

Christiane Amanpour: Some 75 percent of Americans agree with an increase in tax on millionaires as a way to pay for these jobs provisions. Do you not feel that by opposing it you’re basically out of step with the American people on this issue?

Boehner: Well, over half of the people who would be taxed under this plan are, in fact, small-business people. And as a result, you’re going to basically increase taxes on the very people that we’re hoping will reinvest in our economy and create jobs. That’s the real crux of the problem.

Boehner’s spokesman, Michael Steel, quickly admitted that the speaker was mistaken. When we emailed him asking for backup, he said: “He could have worded it better.”

But Steel then went on to repeat an older exaggeration — about a different tax proposal. He said that “a tax increase on over $200/$250k hits 50 percent of small-business income.” That’s not the tax proposal Boehner was asked about. Furthermore, that old claim refers to half of small-business income, not the number of “people,” the term Boehner used. And even more important, a lot of that supposedly “small”-business income is really from giant firms bringing in over $50 million a year.

Steel was referring to a July, 14, 2010, report from the Joint Committee on Taxation that  analyzed the effects of President Barack Obama’s proposed 2011 budget, which, among other things, called for allowing the Bush tax cuts to expire for people making over $200,000 (or for couples making over $250,000). And as we’ve pointed out over and over, the JCT study doesn’t back up the claim Steel and other Republicans constantly repeat, as the JCT itself made very clear:

Joint Committee on Taxation: These figures for net positive business income do not imply that all of the income is from entities that might be considered ‘small.’ For example, in 2005, 12,862 S corporations and 6,658 partnerships had receipts on more than $50 million.

‘Millionaire’ Small-Business Owners

But what about the “millionaires” tax? Are half of the people making over $1 million actually small-business owners? It so happens there was an in-depth report that speaks to this very point, issued in August by experts at the Treasury Department’s Office of Tax Analysis. It is a “technical paper” by career employees, not a policy document, and the most sophisticated look at the issue that we’ve seen thus far.

This report notes that the definition of small-business owners that Republicans have often used in the past is “overly broad,” which puts it mildly. That definition counts as a small-business owner anyone who reported any “flow-through” business income on his or her personal tax return. So it takes in owners of large firms as well as small, and also people whose business income is negligible and who earn their living primarily from other means.

For example, a partner in a Wall Street hedge fund would be classified as a “small”-business owner even if he or she raked in $100 million from trading securities. And a corporate executive making $1 million in salary and bonuses would be counted as a “small-business owner” if he or she also received a few dollars from the incidental rental of a ski condo or beach house.

That old, sweeping calculation was often the best government agencies could do, but new data sources allowed the Treasury to take a more precise and nuanced measure of small-business owners. The new Treasury analysis improves on earlier efforts in two major ways:

  • It eliminates millions of “businesses” that don’t really have any business activity (such as passive investment vehicles, or the occasional rental of a vacation house).
  • It distinguishes businesses that aren’t really “small.” Only businesses with less than $10 million in gross income or deductions are counted as “small” in this analysis.

And what does that tell us about Boehner’s claim? He would be correct only if we count as “small-business people” all those who get any income at all from a business making less than $10 million. Under that definition — which the Treasury paper calls “broad” — about 273,000 of these “millionaires” were classified as small-business owners. That comes to about 70 percent of all “millionaire” returns. By that measure, Boehner’s “over half” estimation would be correct with plenty of room to spare. But for most of those taxpayers,  the small-business income is incidental.

The Treasury paper also supplied an alternative “narrow definition” of small-business owners, counting “only individuals with active net income from small businesses that equals at least 25 percent of the taxpayers AGI [adjusted gross income].” That still includes a lot of people who get the majority of their income from sources other than their small-business income. But it gets us a lot closer to the mom-and-pop small-business owner many of us envision when politicians speak of “small-business people.”

And under this more precise measure, the millionaires’ picture changes dramatically. Only 51,000 of the 392,000 millionaires were small-business owners under this not-so-narrow definition. That comes to about 13 percent. Nowhere close to half.

“We note that our revised methodology is but one reasonable approach that could be used to identify small businesses and their owners,” the report qualifies. “However, we believe it represents a significant improvement over previous methodologies that were constrained by data limitations.”

Job Creators?

Since Boehner argued the tax would hurt those who create jobs, here are two pieces of additional perspective from the report:

  • Small-business owners in general are often lauded as job creators. But “millionaires” make up only a tiny fraction of the small-business owners. How tiny a fraction? According to the Treasury experts’ “broad” definition, 1.4 percent, and according to the narrow definition, 0.5 percent.
  • And contrary to the “job creator” image, being a small-business owner doesn’t mean you actually employ anyone. In fact, most don’t. According to the Treasury report, “We also find that slightly more than one-fifth of small businesses conform to our definition of an employer.”

As we’ve always said, Republicans do have a point when they say raising individual tax rates results in raising taxes on business owners whose business income flows through to their personal returns. And standard economic theory holds that raising business taxes tends to dampen employment to some degree. But rather than stick to the facts, Boehner and other Republicans exaggerate greatly the number of employers who would be affected by raising taxes on upper-income individuals.

— Robert Farley