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Across-the-board tax cuts enacted under President George W. Bush are set to expire at the end of the year, stoking the political debate over tax policy.
President Barack Obama campaigned on the position that lower tax rates should only be extended for single people who make less than $200,000 a year, or couples who make less than $250,000. Republicans, on the other hand, want the lower tax rates to stay in place for everyone.
One of the arguments Republicans use to support tax cuts for the wealthy is that most are small business owners. Conservative pundit Stephen Hayes made the case on ABC News' This Week, after U.S. Treasury Secretary Timothy Geithner affirmed the Obama administration's commitment to raising taxes on high earners.
"The people that we're talking about, these so-called wealthy, most of them are small-business owners," Hayes said. "So if you're talking about cutting taxes for people who can put people back to work, that's who you're talking about."
It's certainly more politically palatable to urge lower taxes for mom-and-pop business owners than for Wall Street fat cats. But is it true that most of the rich are small business owners?
We fact-checked similar claims during the 2008 election, so we're familiar with the sources that both sides use to argue this point.
The basis for Hayes' claim comes from details gleaned from Internal Revenue Service data. The U.S. Treasury Department found in 2007 that many of the wealthiest tax filers report some type of non-wage income, such as income from a sole proprietorship, a partnership or an S corporation. (An S corporation is simply a corporation that chooses to pass corporate income, losses, deductions and credit through to their shareholders for federal tax purposes.) The Treasury Department estimated that 75 percent of tax payers in the top bracket reported this type of income.
Does this mean that all those wealthy taxpayers were small business owners? Probably not. This kind of income could be reported from anyone who earned money from a source other than a regular job, such as consulting or public speaking. It could also be reported by those who make most of their income from partnerships, such as law firms and medical practices. And it could include investors who have little involvement in the day-to-day operations of a company.
It's impossible to know how many of these high earners are what most people think of as small business owners. One indication, however, might be if these wealthy taxpayers reported that most of their income was from this business-type income. The nonpartisan Tax Policy Center analyzed IRS data in March 2009, looking to see how many wealthy tax filers could say that half of their income or more came from business income. The center found that, among the wealthiest filers -- the top 1 percent -- only 25 percent earned more than half their income from business-type income. The percentages for non-wage income were even smaller among taxpayers earning less. (Editor's note: After we initially published this item, the Tax Policy Center released a new analysis looking at business income by tax bracket. They found that in the top bracket, only 32.5 percent earned more than half their income that way.)
Hayes defended his statement in an e-mail to PolitiFact. While he conceded that not every tax filer who reports business income is a small business owner, he said he found the 50 percent cut-off for defining owners arbitrary.
"I can see not counting as a 'small business owner' someone who makes $500,000 in from an employer and $2,000 in small business income. And if we included all of those people the number would be comfortably above 'most' among the top earners. So reasonable people can disagree about where to draw that line. But it seems odd that we would not count as a 'small business owner' someone who owns a small business that generates 49 percent of her overall income," he said.
There's one final point we want to clarify here for our readers, because we've been asked about this before: If you are a small business owner yourself, you would have to be a whiz running a very profitable small business to get hit with a tax increase under the plan Obama supports. You would have to report total income of more than $200,000 (or $250,000 for couples) after all your business expenses were deducted. You may remember this being a key point during the Joe the Plumber debate during the 2008 campaign when Samuel Joseph Wurzelbacher said to then candidate Obama, "I'm getting ready to buy a company that makes 250 to 280 thousand dollars a year. Your new tax plan's going to tax me more, isn't it?" Back then, the Tax Policy Center analyzed all taxpayers, of any income level, who report these types of business income. They found only about 2 percent of them would see tax increases if the government increased the rates on the top earners. So the vast majority of possible small business owners would not see a tax increase if the Bush tax cuts expire for those in the top incomes.
In conclusion, do many wealthy tax payers report types of business income that might be from owning a small business? Sure. But it's impossible to tell how many meet the definition of what most of us think of when we think of small business owners. Other data indicate that among all tax payers who might be small business owners, most would not see taxes go up if the Bush tax cuts for the highest earners are allowed to expire. Hayes said that "these so-called wealthy, most of them are small-business owners." We rate that statement Barely True.
Editor's note: This statement was rated Barely True when it was published. On July 27, 2011, we changed the name for the rating to Mostly False.
U.S. Treasury Department, Treasury Conference on Business Taxation and Global Competitiveness, July 23, 2007
Tax Policy Center, Distribution of Tax Units with Small Business Income, by Cash Income Percentile, 2009, March 17, 2009
Interview with Stephen Hayes
Interview with Stuart Kantor of the Tax Policy Center
PolitiFact, Most small businesses won't be subject to Obama's tax increases, Oct. 16, 2008
Factcheck.org, Half of the Wealthy Own Small Businesses?, March 6, 2009
Bloomberg Businessweek, The $250,000 Small Business Tax Question, March 26, 2009
The Washington Post, Small Businesses Brace for Tax Battle, April 27, 2009
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