McConnell: $250K+ Small Biz 'Hit Hardest'

McConnell: Small Business Owners Making $250K 'Hit Hardest By This Recession'

He's a rodeo clown, distracting the angry beast so the rider doesn't get trampled.
My favorite is when the Republicans say those "small business owners" shouldn't get taxed more because it would hurt job creation. They got a huge tax cut for 7 years, and look where we are now. Meanwhile, the middle class is shrinking, 15% of Americans live in poverty and most working people make less that they did in 2001.
"Reality has a well-known liberal bias." Stephen Colbert

jason, can you really be this dense? From the WSJ:

The nonpartisan Tax Foundation will issue a report on Friday that likely hands Republicans more ammunition in the debate over pending tax increases on small businesses. The report’s draft title sums it up: “Over One Third of New Tax Increases to Come from Business Income.”

Democrats and Republicans have clashed recently over the likely economic impact of allowing tax rates to rise next year for higher earners – families making more than $250,000. Democrats contend that only about 2% to 3% of small-business owners would be affected by the higher rates. Republicans counter that about half of small-business income would be hit by the higher taxes, creating a new drag on hiring and investment.

Despite its headline, the Tax Foundation report includes findings that will give some comfort to both sides as they argue over extending some or all of the Bush-era tax cuts.

The draft report says:

- About 39% of the proposed $630 billion tax increase on high-income taxpayers would come from business income. That’s about $246 billion.

- Almost three-quarters of tax filers in the highest tax bracket reported business income, compared with 20% of those in the lowest bracket.

- Of the roughly $864 billion in taxable business income reported on individual tax returns in 2008, nearly 68% was claimed by taxpayers earning over $200,000 and 35% was claimed by taxpayers earning over $1 million.

- Federal taxation of business income through the individual tax code exceeded the amount raised through the federal corporate tax code in 2007 – an indication of how important small businesses have become in the U.S. economy. Unlike traditional taxable corporations, small businesses often don’t pay taxes themselves; instead, taxes on their profits are paid by their owners through the individual income tax.

As for the Democrats’ contention that only 3% of small-business owners pay the top rates, the new report finds that claim “factually accurate but misleading.” It adds that those 2% to 3% “represent the fortunes of larger, faster-growing, more profitable businesses whose continued prosperity is disproportionately important to economic recovery.”

I own and manage a quick-service restaurant business in New York City with 23 locations. Like most small businesses, the company is an LLC, which means that the owners pay taxes on the profits of the business on their personal tax returns. Each year, the company distributes just enough cash to enable the owners to pay the tax attributed to the profits of the business. Raising personal tax rates will force the company to distribute more cash, leaving less available to grow the business.

Our company employs 700 people and has tripled in size in the last decade. We have created about 500 jobs during this period, yet again demonstrating how well small businesses create jobs. With the recent increase in income taxes in New York, coupled with the impending federal income tax increases, the company will have to distribute about 7% more of its taxable income annually, which will slow our rate of growth and therefore job creation.

While the Democrats may view the expiration of the Bush tax cuts as a way to increase taxes on "the rich," they have forgotten that thousands of small- and medium-sized private companies will be negatively impacted by their inaction. Perhaps it would make sense to exempt flow-through income from an active trade or business from the higher rates.

Simon Jacobs

CEO

Hale and Hearty Soups

New York

More from the WSJ:

Recently, for example, Vice President Joe Biden harshly rejected House Minority Leader John Boehner's assertion that the hikes would harm small businesses, saying that "he has created this myth that a tax cut for millionaires is actually a tax cut for small business. There aren't 3% of small businesses in America that would qualify for that tax cut." House Speaker Nancy Pelosi flipped the number around, saying that the planned tax increases would exempt "98% of American families and about 97% of small businesses."

The impact is far more severe than Mrs. Pelosi and Mr. Biden suggest. In fact, the sound bite about 3% of small businesses, which has been picked up by numerous pundits, is one of the more misleading statements in the long history of economic propaganda.

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. That's the number to look at, not the 3%. Would Mrs. Pelosi and Mr. Biden deny that the more successful firms owned by individuals in the top income-tax bracket are disproportionately responsible for investment and job creation?

It's clear that business income for large and small firms will be hit by the higher tax rates. And in point of fact, firms of all sizes contribute to the nation's prosperity. So it's a mistake to focus only on the impact of increased tax rates on small business. But will the higher rates actually cause a significant reduction in business activity?

Economic research supports a large impact. A pair of papers by economists Robert Carroll, Douglas Holtz-Eakin, Harvey Rosen and Mark Rider that were published in 1998 and 2000 by the National Bureau of Economic Research analyzed tax return data and uncovered high responsiveness of sole proprietors' business activity to tax rates. Their estimates imply that increasing the top rate to 40.8% from 35% (an official rate of 39.6% plus another 1.2 percentage points from the restoration of a stealth provision that phases out deductions), as in Mr. Obama's plan, would reduce gross receipts by more than 7% for sole proprietors subject to the higher rate.

"Meanwhile, the middle class is shrinking, 15% of Americans live in poverty and most working people make less that they did in 2001."

The more government programs we have, the bigger government gets, the more the American dream dies.

From Crain's:

Everyone seems to recognize that the economy is weak, unemployment is still high and we should be encouraging rather than discouraging economic growth. Unfortunately, Congress is about to deal New York a huge setback by allowing the Bush tax cuts on capital gains and dividends to expire, hurting the hundreds of thousands of small business owners who are just trying to stay afloat.

Beginning in 2011, if these tax reductions are not extended, the majority of small business owners will be hit hard by individual income tax rate increases. Think about that: During the middle of the worst recession of our lifetimes, rather than taking steps to encourage economic recovery, Congress plans to hike taxes.

Allowing current capital gains and dividend tax rates to expire would rob companies in New York of the capital they need to make needed investments and create new jobs. This will not only damage our state's prospects for a quick economic recovery, but will actively hurt the economy. Even the Congressional Budget Office agrees, stating recently that “economic growth would be stronger next year, unemployment would be lower next year” if these tax cuts are extended.

These tax increases will not fall primarily on the super-rich titans of Wall Street, as some might suggest. Instead, they will affect small business owners who are the lifeblood of the American economy.

According to a National Federation of Independent Business survey, 75% of small businesses are organized as pass-through entities (sole proprietors, partnerships, S-corporations and such), meaning they pay taxes on their business income based on the individual tax rates. Worse, the businesses most likely to face a tax increase are those employing between 20 and 250 employees, the same businesses that, according to U.S. Census data, employ more than 25% of the total work force.

Increasing the individual rates will mean that business owners have less money for business investment and job creation. We're not talking about buying a yacht; we're talking about buying new equipment that benefits a company's bottom line and results in more hiring. One study found that a 5% hike in individual tax rates decreases business investment by 10%. Raising taxes during past economic difficulties has not led to growth, and there is no reason to think that this time will be different.

Julia you continually prove yourself to be a moron. The reason the middle class is shrinking is because the Republicans continue to strip the government of its abilities. The only reason a middle class exists is because government has continually created programs that allow the middle class to exist.

Shrink government say good bye to the middle class. Please read study history and you wont make such moronic comments.

LICC,

A company with 700 employees is NOT a small business.

"Julia you continually prove yourself to be a moron. The reason the middle class is shrinking is because the Republicans continue to strip the government of its abilities. The only reason a middle class exists is because government has continually created programs that allow the middle class to exist."

I completely disagree with you. The American dream is dead because the gov't keep sucking up private resources and squandering the money on foolish ventures. Most likely, future generations will see a drastic decline in their standard of living. The decline of the middle class started in the 60' and 70's with the dramatic increase in the welfare state. We disagree profoundly, and the philosophical difference is enormous. You can try to marginalize those who disagree with you with sophomoric names(moron,idiot.tea bagger.stupid,etc), but your attempt will fail and only make your arguments and you look small and petty.

Julia - how is the middle class created? Please answer.

First, tax rates are based on marginal income. So if President Obama gets what he's advocating for on this issue then EVERYONE will have taxes lower than they would be under the Clinton tax rates. This includes those making over $250,000 in income because it's only their marginal income above $250,000 that would be taxed at a higher rates.

Second, while we can debate what income level separates the "rich" from the middle class, it's offensive to claim that those whose incomes are above $250,000 a year have been hit hardest by this recession.

Third, it is also not credible to claim that an increase in marginal tax rates from 36% to 39% on marginal income ABOVE $250,000 will have a significant effect on employment levels. While it is true that most new jobs are created by "small businesses" this is misleading because the more important indicator of which companies are adding employees are whether or not the business is growing. Large or small, growing businesses add employees. A small "mom and pop" business that has relatively stable demand will not add any employees merely because their marginal tax rates on income above $250,000 is 36% as opposed to 39%. A business that is growing fast will pretty much be indifferent to a 36% vs 39% marginal tax rate. If adding an employee can bring in more income no rational business person will say "hmm, I could hire one more worker and bring in an extra $100,000 income but I'm not going to do so because now I'm only going to net $61,000 in extra income versus $64,000 under the Bush rates."

'Julia - how is the middle class created? Please answer." You tell me and then i will correct you.

my greatest concern is that the middle class see, hear and know of mcconnell and his ilk--those who do are astounded

but the gop does such a good job propagandizing the middle-class---as in the "death tax", not that any middle classers ever have estates that would be sufficiently large to be taxed---this "small businesses" crap is just that---and there should be more (not less) progressiveness in rates---a 250K earner pays the same rate as a multi-millioen dollar earner

'not that any middle classers ever have estates that would be sufficiently large to be taxed'

People who used to come to this country dreamed of one day being so fortunate as to own estate taxes... But of course they wouldn't actually want to pay it because they would then be taxed twice on the money they earned. Those who wanted to take from the rich and be on the dole typically used to stay where they were (greece comes to mind, no offence to greeks on the board :)

"The nonpartisan Tax Foundation"

HAHAHAHA! That's as much an oxymoron as "The Lovely Long Island City"!

Poverini Ricchi! Non possono acquisire cio che vogliano.

Pover, pover-ini!

julia the ugly one knows how the middle class is formed.

its when poor people work harder and harder and then smile at rich people appreciatively.

the more a poor person appreciates the rich, the more they become the middle class.

repeat after me.

"thank you, thank you rich person for being rich. thank you, thank you"

The poverty rate is now higher than 50 years ago when the government began 'the war on poverty'. 'Can we all agree', that the 'war' has failed ? Maybe, we should try a new direction to help the poor and middle class.

of course, you've nailed it.

appreciate the rich and the rest will flow.

thank you, thank you rich person for being rich.