When he proposed an extension of Bush era tax cuts for families earning under $250,000 a year, President Obama this week suggested the move would benefit all but two percent of households. But because those earning above $250,000 would experience a tax increase, Republicans characterize the proposal as a massive penalty on small businesses. A bigger tax bill would prevent small business owners from creating jobs at a critical juncture in the US economy, the argument goes.
Jeffrey Cornwall, Director of the Center for Entrepreneurship at Belmont University, explains in The Entrepreneurial Mind blog at the Christian Science Monitor: "Many who fall into this proposed tax increase are entrepreneurs. We know that for every 1% increase in the marginal tax rate that we can expect a 1.5 to 2.0 percent decrease in start-up activity."
In an editorial on the subject, the Wall Street Journal points out: "Congress's Joint Tax Committee—not a conservative outfit—estimates that in 2013 about 940,000 taxpayers will have enough business income to meet Mr. Obama's tax increase threshold." (To be sure, New York Magazine notes that all of the media, as well as the President, glossed over one detail: Even the wealthiest Americans are not actually excluded from the proposal. Everyone will be eligible for the extended tax cut on the first $250,000 in income they earn.)
But an organization called FAIR (short for Fairness and Accuracy in Reporting) points to the same Committee's estimates when it argues that the GOP's claim needs a fact check. A FAIR media advisory today laments that major news outlets including USA Today, the Los Angeles Times, the Washington Post, Good Morning America, and CBS Evening News repeated the Republican argument—that withholding the tax cuts from high earners is an effective penalty on small businesses—without acknowledging that the claim is, as FAIR says, "baloney."
According to FAIR: "The share of filers who could qualify as small business owners is tiny—about 2 percent of small business owners, according to the U.S. Treasury Department. The increase would affect, according to the Joint Committee on Taxation, about 3 percent of filers who claim any business income."
And as far as jobs creation goes, the impact is likely even smaller. According to the Small Business Administration, which defines a small business as any that employs fewer than 500 employees, there are 27.5 million small businesses in the U.S. But most recent Census data indicates that only 6 million of them have employees. It's safe to say that many of the 21.5 million small businesses that don't employ anyone are sole proprietors—including the legions of so-called free agents in this "free agent nation"—who are not looking to hire anyone or create new jobs, tax cut or not.
If the argument about the impact of the tax increases on jobs creation were re-framed to consider only small businesses that would actually hire a new employee with the cash saved by a tax cut, it would be weakened considerably. If the percent of wage-paying small business owners who take home more than $250,000 annually is the same as among small businesses in general, then that translates to about 180,000 small business owners whose taxes would increase under the Obama proposal. Would being spared the tax increase enable each of them to bring on a new hire every month? That's what it would take to make a dent in unemployment.