McCain's Small-Business Bunk

Note: US Chamber cites 23 million figure: "The U.S. Chamber is proud to pay special tribute to some of its most valued constituents: America's 23 million small business owners."

McCain's Non-explanation
McCain cannot justify his 23 million claim. We asked McCain spokesman Brian Rogers for substantiation and received the statement that we reprint here. We find it simply won't do.

Rogers starts by saying that Obama's health care proposal to provide coverage for uninsured workers would amount to a "tax," either in the form of higher costs for covering employees or "cash to the government." But McCain was talking about income tax rates, not higher business costs. That's not justifying McCain's claim; that's trying to change the subject.

Furthermore – as we've just seen – the vast majority of those that McCain is counting as small-business owners have no employees and wouldn't encounter any added costs for covering workers. Obama's plan wouldn't apply to every small employer, either. It says: "Small employers that meet certain revenue thresholds will be exempt." Also, after Rogers sent his message, Obama announced July 13 that he is proposing to grant $6 billion per year in tax credits for small businesses that provide health insurance plans, covering up to half the cost of premiums paid to cover employees.

As for actual income tax rates, which is what McCain keeps talking about, Rogers says "if they make over $250,000 and file as individuals ... their taxes go up." But  this leaves out all but a very small fraction of those McCain counts as small-business owners. Rogers also says taxes will go up if small-business owners "have capital gains or dividends," but Obama's proposal would not increase rates on capital gains or dividends for couples making under $250,000, or singles making under about $200,000, regardless of whether they are classified as small-business owners or not.

How Many Would Actually Pay More?
McCain is right about one thing. Many small-business owners would indeed see their taxes go up if Obama is elected and raises the top income-tax rates. According to a survey from the National Federation of Independent Businesses, about eight out of 10 small-business owners responding to the poll report that they are organized legally in a way that would require them to pay taxes on their business income as individuals, rather than as a corporation. But since Obama's plan wouldn't affect those making less than $250,000 for couples, or about $200,000 for singles, we need to estimate how many would fall into those high-income categories.

Obama's plan, according to his economic policy director Jason Furman, would return the top two federal income-tax rates to what they were before Bush lowered them. In addition, Obama would adjust the income-tax brackets to ensure that no married couple making under $250,000 or single filer making under $200,000 would pay the top rates.

The actual number of business owners who would be affected turns out to be well under a million, and the number of employers would be even less. Based on the number of taxpayers who now report any sort of business income on their returns, the Urban-Brookings Tax Policy Center projects that 663,608 taxpayers with business income, or business losses, will fall into the top two tax brackets in 2009, when any Obama tax changes would first take effect. Not all of those can properly be called "small-business owners," however. Some are farmers. Many are lawyers, accountants or other professionals who get some of their income in the form of partnership distributions. Others may be passive investors in real-estate partnerships or similar investment arrangements and not really persons who own and manage a business.

It is also not clear how many who report business income actually employ any workers. In 2004, the Tax Policy Center found that hundreds of thousands of individual taxpayers who had business income from partnerships or subchapter-S corporations (whose owners pay taxes as individuals) did not claim any tax deductions for employee expenses. For all these reasons we judge that the actual number of small-business employers who would face higher tax rates under Obama is probably far below 663,608, and certainly a far cry from McCain's ridiculously inflated 23 million figure.

Lower Taxes for Many
While Obama's plan would raise rates at the top, it also would grant what he calls a "Making Work Pay" tax credit of up to $500 per person, or $1,000 per working family. Since this credit would not begin to phase down for couples making less than $150,000, we judge it likely that many, if not most of the 23 million that McCain counts as "small-business owners" would likely get tax reductions.