As President Barack Obama and House Speaker John Boehner dickered over how to avoid the so-called fiscal cliff, the issue of who might pay more in taxes was a persistent stumbling block.
The White House said there could be no deficit deal unless Republicans agree to raise tax rates on the wealthiest households and proposed increasing rates on incomes greater than $250,000 a year for married couples ($200,000 for individuals).
Republicans wanted to focus the talks on spending and entitlements.
Ultimately a deal brokered by Vice President Joe Biden and Senate Minority Leader Mitch McConnell, a Kentucky Republican, was approved. It allowed rates to rise on incomes above $450,000 for married couples.
But during the negotiating, Boehner balked at increasing the maximum 35 percent tax rate on high-income taxpayers at all because of the effects for small business.
"The problem with raising tax rates on the wealthiest Americans is that more than half of them are small business owners," Boehner said in a news conference. "Raising tax rates will slow down our ability to create the jobs that everyone says they want."
PolitiFact has examined a similar claim Boehner made about small business owners before, and rated it False. FactCheck.org also has looked at the issue, calling it "an incorrect talking point" and a "bogus claim." But we wondered about current figures behind the claim, and several readers asked about its accuracy.
We asked Boehner's office how he backed up the statement. His staff said the tax increases would hit half of all small business income, and they pointed us to a January 2012 report from the President’s Council on Jobs and Competitiveness.
The council's report states: "About half of business income now accrues to pass-through entities such as S corporations and partnerships; although the income of such pass-through entities is subject to tax at the individual level, it is excluded from the corporate tax."
In other words, Boehner's staff said, many small businesses file their taxes as individuals, not corporations, and 53 percent of all business income is taxed through the individual code.
Boehner's staff also cited a report by the nonpartisan Joint Committee on Taxation in Congress which said the tax hikes would affect roughly 940,000 small business owners. It, too, found that 53 percent of business income would be reported on tax returns in the top brackets on which Obama would raise taxes.
That does show that some small business owners would see taxes go up. But it falls short of supporting Boehner's statement.
While the JCT report found that 53 percent of business income would be reported in the top two tax brackets, that is not at all the same as saying that half of the earners are being taxed at that rate.
In fact, the JCT estimated that just 3.5 percent of taxpayers with business income in 2013 would fall in the tax brackets that would rise under Obama's proposal.
And the JCT said its figures "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 of more than $50 million."
S corporations and partnerships are "pass-through" businesses in which profits pass from the business to individual shareholders for tax purposes. They include sole proprietorships and such partnerships as big law firms and financial funds. Goldman Sachs was classified as a partnership before it went public in 1999.
So what is a small business?
The Office of Tax Analysis at the U.S. Treasury Department issued a study in 2011 that recognized the need for a clear definition. The authors acknowledge that defining a small business is a matter of setting some subjective parameters.
The ones they set include a limit of $10 million in income or deductions to be counted as "small," and a minimum labor deduction of $10,000 to distinguish businesses that don’t have any employees.
Other tests they applied excluded businesses on the very low end of the scale, such as those with $4,600 or less net annual income. They defined an "owner" as someone who gets at least one-fourth of income from a small business.
Not surprisingly, by narrowing the definition, far fewer tax filers qualified as small businesses.
The analysis found that:
- Only one-fifth of small businesses are employers, using their definition.
- Only 8 percent of small-business owners have income of $200,000 or more. So 92 percent of small-business owners wouldn’t have been affected by Obama’s proposal.
- Slightly more than half of small businesses reported total income of less than $50,000, and half of those businesses reported a tax loss for the year.
- Only 0.5 percent of small businesses reported a profit in excess of $1 million. For those businesses, investment and rental income comprised roughly half of their reported income.
- Of the taxpayers in the top two brackets that would be increased, only 11 percent reported any small-business income, and only 9 percent qualify as small business owners.
Boehner's statement was: "The problem with raising tax rates on the wealthiest Americans is that more than half of them are small business owners."
That is wrong on two points -- the "half" and the "small business owners."
Of the business income reported on tax returns, half of it would have been taxed at the top two rates, the Joint Committee on Taxation found. But that doesn’t mean half of the earners are paying those rates.
And it’s incorrect to call small business owners and millionaires who would see a tax increase one and the same. For top earners who report business income, it is often just a fraction of their total income. They are not the folks operating small manufacturing plants or neighborhood pizza parlors. In fact, only 0.5 percent of small businesses make that kind of money.
More often, small businesses are small in every sense -- most have incomes of less than $50,000 and almost all have profits of less than $1 million -- and they wouldn’t be affected by the millionaires tax.
Boehner’s statement is not accurate. On the Truth-O-Meter, his claim rates False.