An Honest Take on Taxes and Small Business

In 2004, William Gale penned a one-page piece for TaxNotes arguing, "Roughly 97 percent of small businesses would not be affected at all by increases in the top two tax rates."

That line has been repeated frequently in light of the upcoming expiration of high-bracket tax cuts.

Kevin Hassett and Alan Viard in today's WSJ counter the logic, essentially correcting Gale's overinterpretation.  It may be true that 97 of tax returns with small biz income are not in the top tax brackets, but that is not the same as 97 percent of small businesses. Gale should know better.

The 3% figure, which is computed from 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 may be interesting for some purposes, but it is irrelevant for the assessment of the economic impact of the tax hikes.

The numbers are clear. According to IRS data, fully 48% 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.



This shouldn't be a political issue, but too many folks are in denial that high income taxes on the "rich" are big burdens on entrepreneurs.

Comments

[Leif]

These numbers could both be true. So your argument is not very strong without additional information...

[Not Telling]

We need to continue to tax the rich - they have all the money. Numbers below.

http://youareproperty.blogspot.com/2010/06/tax-rich-corporations-and-you-people.html

[John Hughes]

Dear Mr. Kane,

I think what you are saying is that while 97% of small business people aren't in the top two tax brackets, the 3% that are in the top two tax brackets make a lot of money, totaling 48% of the total net income of all small businesses.

Nothing you have said counters the argument that you purport to counter.

John

[eighdogs]

I've run a few small businesses. And I mean small. Working for myself, or hiring up to 3 part time workers and 2 full time workers at the same time. So a small business, like mine , that may have pulled in $250,000 in fees and commissions, would also deduct business expense for overhead, office supplies, salaries, and wages. etc....

Frankly, most small business people don't net more than a couple hundred thousand, tops. Working solely by myself I once made $120,000. No overhead except for my home office, and no salaries. And that still wouldn't have been enough to get whammed by raising the tax on those making more than $250,000.00, net. You don't get taxed on the gross. You get taxed on the net.

You might have a business with 10 employees that drives $500,000 in gross revenues, but once you subtract overhead, salaries, insurance costs, licenses, and other fees, and other business expenses, you still might not make over $250,000 net take home pay from your business.

I've insured lot's of small businesses, and most were not making anywhere close to $250,000.00, net. Some weren't even making that in gross revenues, much less net.

So the argument against raising taxes on those making over $250,000.00 is a straw man argument. Very little basis in real world situations.

And now that I work solely for myself again, I'm going to qualify for that higher tax bracket, and I'll be happy to pay it. Because I'm an American. And this country has given me all sorts of opportunity to get into that higher tax bracket. An opportunity that many in other countries don't have. So, yeah, I don't mind doing my part to contribute, through taxes, a part of my gain for the betterment of my country.

[Jackson Thompson]

" sole proprietorships, partnerships, and S corporations "? Please! How does that make it a small business? Or even a medium size business. The ownership status a company has nothing to do with it's size. There are many small businesses that are LLCs or corporations.
The writer may be correct in the evaluation of the 97%. I for one have some side income that is claimed on my 1040. But, he is using the same faulty logic but considering from the money's point of view instead of the people's. If money is speech I guess it can have a point of view as well ;-).
So let's just say that neither number has anything to do with the real world of SMALL business.

[Jackson Thompson]

Also, if trickle down works, why are at 9.6% unemployment? Where is the stimulus package from the wealthy? If taxes got even lower on the rich than it would work? How low does it have to get? There is no evidence to support the tinkle down theory. Time to end this experiment that has taken a huge toll on our middle class.
The Federal government is the largest single employer of middle class wage earners. If the rich pay more taxes, then it DOES go into the pockets of middle class worker.
Think what are the 10 most honorable jobs you can? Are more than half of them Government employees?

[A Thought]

Wouldn't the fact that pass through profits are taxed at a high rate encourage reinvestment? If we want businesses to hire then pulling money OUT of the business should be discouraged.

[Charles]

This sounds perilously close to the "No true Scotsman" fallacy.

[Jay]

8% of small businesses account for 72% of all small business income. Depending on the industry, a small business can have up to $27 million in income, or up to 1500 employees. Not exactly Mom & Pop.

[cheap meizitang]

Great article you wrote, really inspired me! I wish I can be like you :)

[Mutui Online]

The ownership status a company has nothing to do with it's size. There are many small businesses that are LLCs or corporations.

[coach outlet]

nothing is impossible for a willing heart.

[christel]

a lot interesting this argument!

[siti web]

this argument is very interesting!

[prestiti]

Congratulation for this blog, there are a lot of interesting news.

[Venice Florida homeowners insurance]

If our tax laws were easier to understand and less complicated then we could spend more time debating the issue itself instead of the interpretation of its impact over and over.

[prestiti]

well written article, i just bookmarked it to read later. i would love to read on new articles. how can i set the rss again? thanks so much!

[alberghi roma]

Congratulation for this blog, there are a lot of interesting news.

[MBT Shoes Uk]

I guess the point is to give and save as much as you can and make your money work for you like the good servant we should strive to be.

[Shop taobao]

* be happy together is good enough. I am not asking for things that I could never get.

[Air Jordans]

OH OH OH OH MY HAPPY ENDING....ALL OF MY MEMORY....

[wwaoc.com]

Business and economy factor of uncertainty forcing everyone to find a new job to improve their family life, but information is often not accurate as expected. In addition to many other requirements that bind, of course, also the level of skills and experience.

[bakariinstitute.og]

If there is someone else is always to impose his will on you and burden you with difficulties, learn to say no! Because this is better than you have in the liver. To maintain our health and fitness is to eliminate the stress that often follow the mind our. How to relieve stress that follows, it may help you overcome various problems of earthly life: