Factcheck.org: McCain's Small-Business Bunk

McCain has repeatedly claimed that Obama would raise tax rates for 23 million small-business owners. It's a false and preposterously inflated figure.

We find that the overwhelming majority of those small-business owners would see no increase, because they earn too little to be affected. Obama's tax proposal would raise rates only on couples making more than $250,000 or singles earning more than $200,000.

McCain argues that Obama's proposed increase is a job-killer. He has a point. It's true that increasing taxes on those at the top would leave them less money for other purposes, including investment and hiring in the case of business owners. But the number of business owners who would see their rates go up would be only a small fraction of what McCain says. Many would see their taxes go down.

Sen. John McCain has been making this false claim over and over, starting with a July 7 speech announcing his "jobs for America" plan:

He repeated it in an address to the League of United Latin American Citizens the next day:

He said it again at a campaign event July 9:

And he repeated it in the first of a planned series of radio addresses July 12:

But repeating a falsehood doesn't make it true. McCain's 23 million claim is a bogus figure.

Outdated, Inflated, Inapplicable
To justify the 23 million figure, McCain spokesman Brian Rogers referred us to a press release by the U.S. Chamber of Commerce, which refers to "23 million small business owners" without citing a source. That is actually an outdated count of all the businesses in the United States, produced by the U.S. Census for 2002, when the Economic Census counted a total of 23,343,821 business firms of all sizes. Of those, 16,845 firms employed 500 persons or more, which still leaves just over 23.3 million classified as "small" by the widely accepted definition that we will use here.

That figure is six years out of date. The U.S. Small Business Administration Office of Advocacy estimates the total number of "small" firms with fewer than 500 workers reached 26.8 million in 2006. That's the most recent estimate. But it is also inflated. Since the total U.S. population was just under 300 million in 2006, it would mean that one in every 11 Americans – men, women and children – is a "small-business owner."

It turns out, SBA's estimate includes more than 20 million "nonemployer" firms, an unknown number of them sideline or hobby businesses run by persons who actually make their living some other way. Census and SBA count as a "small business" anyone who reported as little as $1,000 of business receipts. By that very broad definition, John McCain himself is a "small-business owner," because his tax return shows Schedule C income from book royalties. For that matter, Barack Obama would also be a small-business owner, by virtue of his book income. As would President Bush and Vice President Cheney, as we pointed out in 2004. Of the 26.8 million that SBA counts as "small businesses," fewer than 6 million are actually "employer firms" with any payroll.

From this, we must conclude that to arrive at his 23 million figure, McCain is counting mostly "business owners" with no workers, including those who simply report small amounts of income from sideline or freelance work. McCain is arguing that Obama's tax increase would "destroy jobs," but he's counting mostly firms that don't produce any.

That in itself is seriously misleading. If McCain wants to focus on the effects of Obama's plan on employment, he would do better to confine his count to employers – the just under 6 million firms that actually have workers. And even that figure wouldn't be applicable because Obama's tax increase wouldn't fall on all employers, only on those in the top two income tax brackets.

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.

An Echo of Bush
McCain's claim struck us as wildly improbable the first time we heard it because we debunked a much less expansive claim that President Bush made about John Kerry in 2004. Bush ran a TV ad saying that Kerry's proposal to raise taxes on persons making more than $200,000 a year would affect 900,000 small-business owners. We found Bush's number to be far too high. We noted that Bush was counting as a "small-business owner" anyone who reported even $1 of business or partnership income, regardless of how the taxpayer made their living. At that time, the Urban-Brookings Tax Policy Center estimated that a total of 471,000 small-business employers could be affected.

Republished with permission from factcheck.org.