Factcheck.org: Misleading Ads on Obama's Small-Business Tax Plan

A conservative group called RightChange.com has spent $3 million running ads that largely criticize Obama and his tax plans. They're false:

Two ads say Obama would tax "small businesses" at a rate of "62 percent." He wouldn't. That number is an inflated estimate of the very top tax rate, and it doesn't represent what Obama has proposed.

That false figure includes an increased Social Security tax rate that Obama doesn't support, plus the state income tax rate paid by people making more than a million dollars a year in California.

One ad implies that regular folks just trying to make it as entrepreneurs would be hit with such a rate. But even if this estimate were correct – and it's not – it would affect the wealthiest taxpayers and only 1 percent of those who could generously be considered small-business owners.

RightChange.com, a 527 group out of North Carolina, is largely bankrolled by its president, Fred Eshelman, the CEO of a pharmaceutical research firm, who has contributed $2.7 million of the $3.8 million the group has raised this year. According to OpenSecrets.org, Eshelman has also contributed $2,300 to Sen. John McCain's campaign. Two of the other three members of its board of directors are GOP state legislators in North Carolina. RightChange.com has spent just over $3 million so far.

The group has been running ads on national cable networks targeting Sen. Barack Obama, mainly by calling into question his tax proposals. The ads offer a false picture of how Obama's plan would affect small businesses.

A 62 Percent Tax Rate?
In one of its ads, titled "Angry?," Right Change says that "Obama will tax Wall Street firms ... at 35 percent, while many small businesses pay 62 percent."

An outrage, right? The Tax Foundation's Gerald Prante sure thinks so – about the ad's claim, that is. He wrote a blistering critique of the ad, saying, "This is so ridiculous that I'm almost at a loss for words." Prante went on to question RightChange.com's general knowledge of how taxes work, saying: "The people behind this ad are either downright deceitful or too stupid to understand [marginal tax rates]; and given what else they are putting out ... I don't know which it is."

The Tax Foundation, by the way, has a pro-business leaning.

What has Prante so upset? Well, first, the 62 percent number is just plain wrong. No business – of any size whatsoever – would get hit with such a rate. And "many small businesses" wouldn't face a rate anywhere close to that. Most, in fact, wouldn't see their taxes go up at all. The ad compares taxes for corporations and small businesses based on the assumption that some small-business owners file their taxes as individuals, not corporations. But the overwhelming majority of small-business owners that do so wouldn't face a tax increase under Obama's plan, because it proposes no tax hikes for anyone earning less than $200,000 a year, or $250,000 for married couples.

Plus, the ad's claim that small businesses would "keep only 38 cents of every dollar" shows a fundamental lack of understanding of how people are taxed in this country. That claim is doubly wrong: The figure is false, and, even if it were correct, the "every dollar" charge is nonsense.

Let's look at where that 62 percent figure comes from. It appeared in an op-ed, which ran in the Wall Street Journal, by Stanford economist Michael Boskin, the former chairman of President George H.W. Bush's Council of Economic Advisers. Boskin was talking about what would happen to the top marginal income tax rate of 35 percent under Obama. (Obama says he'll raise that to the pre-Bush-tax-cut level of 39.6 percent.)

Here's the deal on that top marginal rate: In 2008, it will affect those with taxable income (in other words, net income after deductions) of more than $357,700. (For 2009 income, the cut off will be $372,950.) About 1 percent of what could generously be considered small-business owners who file taxes as individuals would be in this tax bracket, according to the Tax Policy Center. The top marginal rate is only applied to money earned above that level. So, if an individual has taxable income of $367,700 in 2008, for instance, $10,000 would be taxed at 35 percent. The rest of that person's income is taxed at lower rates.
In order to come up with his inflated figure, Boskin starts with the 39.6 percent top federal marginal income rate Obama has proposed. He then adds California's top marginal rate of 10.3 percent, a rate that is now only applied to those who earn more than $1 million a year, and is the highest of all state income taxes in the U.S. When Boskin's op-ed ran in late July, the state Legislature was debating a controversial hike in some taxes, which would have put a 10 percent rate on taxable income over $321,000, but that proposal failed. If RightChange.com wanted to make a truthful ad, it would need to say that its inflated tax rate applies to millionaires living in California – not "many small businesses."

Wrong on Social Security Taxes
Boskin then factors in a 1.2 percent rate for a phase out of itemized deductions (returning to the status quo before the Bush cuts), the standard 2.9 percent Medicare tax and a new Social Security tax on income above $250,000 of 12.4 percent. That last number is also vastly inflated and not something that Obama has proposed – and Boskin acknowledges that in an updated version of his Journal opinion pieces. Ironically, RightChange.com e-mailed us that updated version as its back-up for this ad.

Social Security taxes of 12.4 percent are now only applied to income up to $102,000. Obama has supported the idea of lifting that cap but only for income above $250,000. Income between those two amounts would not be subject to Social Security taxes. Boskin speculates in his op-ed that the tax rate on upper income people under Obama "could be as high as 12.4%." But in his revised version, he notes that Obama has proposed a 2 percent to 4 percent tax on such earnings, not 12.4 percent.

Technically, Obama hasn't formally proposed the Social Security change, but he's open to doing so – a decade down the road. Two of his advisers laid out his tax plan in an Aug. 14 Wall Street Journal piece, in which they said he was "considering" the 2 percent to 4 percent Social Security tax, which would "start a decade or more from now." To be fair, Boskin's broad interpretation of what Obama might support came before his adviser's gave this explicit information.

That knocks Boskin's estimate down by a full 12.4 percent for the near future, and by at least 8.4 percent if he were projecting such taxes 10 or more years from now. Those in states with much lower income taxes than California's (or small-business owners who aren't millionaires in that state) would see this top marginal rate drop even further.

Boskin clearly states that he's talking about the very top marginal rate, but RightChange.com ignores that. Its ad goes on to claim that small businesses would "keep 38 cents of every dollar," which is patently false. Even if businesses were taxed at 62 percent, which none would be under either presidential candidate's plan, they wouldn't face such a rate on "every dollar." This is the top marginal tax rate that Boskin is analyzing, and as we explained, it would only apply to net income above $357,700 in 2008. This is the claim that led the Tax Foundation's Prante to question Right Change's motivations or brainpower.

Those Regular-Guy Small-Business Owners
Another ad on RightChange.com's site, titled "Fair," features a couple that owns a kitchenware shop. The woman says, "We started off with a dream and lots of debt. We struggled, but we're making it." She contends that Obama would "punish small businesses" like hers with that 62 percent rate.

The implication that your average mom-and-pop entrepreneurs pay the top tax rate, let alone this bogus version, is absurd. If this woman is taxed at the top rate, she's "making it" better than 99 percent of what could be considered small-business owners.

As we've explained before, many business owners file taxes as individuals and, therefore, pay personal income taxes on their business income. But the overwhelming majority of business owners (and people in general) do not earn enough to be affected by any tax increase under Obama. They earn less than $200,000 as individuals or $250,000 as a couple, and Obama proposes not raising their taxes.

Would any small-business owners pay more? It's likely. Obama plans to return the top two income tax brackets to their rates before the Bush tax cuts. There's no clear agreed-upon definition of "small business." But the Urban-Brookings Tax Policy Center projects that 663,000 taxpayers who report business income, or business losses, in 2009 will fall into the top two brackets, including 457,000 who are projected to fall into the top bracket. That's 1.3 percent of all tax filers who are expected to report business income or losses, including lawyers and other professionals who get partnership distributions, those who are passive investors in deals such as real estate, farmers and others with freelance or outside consulting income. Those who could legitimately be called "small-business owners" would be even less than that.

How much would Obama raise taxes for the top earners? He says he'll increase their marginal tax rate of 35 percent to 39.6 percent, which would mean they'd pay 4.6 percent more on net income above $372,950 in 2009. They'd also pay 3 percent more on income from $200,000 (or $250,000 if filing as a married couple) up to $372,950, since the second-highest tax rate would also be raised for such earners.

And There's More
The "Angry?" ad also says that Obama would tax "Wall Street firms that caused the crisis at 35 percent." That's the current corporate tax rate, and Obama has made no proposal to change it. But Boskin's analysis compares an individual top marginal rate to a combined corporate marginal rate on dividends and capital gains, which he calculates to be 58 percent. Both his calculations are inflated beyond what Obama has proposed, but if RightChange.com wanted to give an apples-to-apples comparison, it would use Boskin's higher number for the corporate rate.

We could go on about other RightChange.com ads, like the one that claims Obama's "retirement tax" would "punish" seniors – even though, as we've said, Obama's proposal to raise the capital gains and dividend rate would only affect those retirees making more than $200,000 a year (or $250,000 for a couple). And he proposes eliminating the federal income tax for seniors 65 and older who earn less than $50,000 a year.

RightChange.com, which calls itself a "nonpartisan" organization, also touts on its home page the Republicans' criticism of Obama's "refundable tax credit" of $500 for workers (or $1,000 for couples), calling it a "wealth distribution" scheme. It doesn't mention that McCain proposes a "refundable tax credit" of up to $2,500 ($5,000 for couples) as part of his health care plan.

Republished with permission from factcheck.org.

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