It may be time to add another phrase to the fiscal cliff lexicon: carve-out.
Republicans in the Senate are brainstorming ways to shield small businesses from tax hikes should they be unable to persuade President Barack Obama to extend the Bush tax rate cuts for everyone.
A sort of GOP Plan B, a carve-out could give Republicans — and some red state Democrats — a way to save face if they’re faced with a choice between allowing the government to go over the fiscal cliff or swallow some sort of marginal tax rate increases.Maine Republican Susan Collins and other GOP senators are toying with what they’re calling a “carve-out” to benefit small businesses that pay their taxes through the individual side of the Tax Code.
Collins, for her part, is reprising her proposal to impose a 2 percent surtax on the wealthiest earners, with a carve-out. But the concept could also apply to a broader marginal rate increase. The idea is to exempt those profits, from S-corporations, partnerships and other passthrough entities, from the income tax increases Obama wants for top earners...
“The problem with raising tax rates on wealthy Americans is that more than half of them are small-business owners,” Boehner said in a press conference last week.
The argument that raising tax rates on upper-income individuals would harm entrepreneurs is likewise flawed. We love small business as much as anyone. But with the U.S. facing unsustainable budget deficits that will require many Americans to pay higher taxes, it’s worth separating fact from fiction.
First, small businesses destroy almost as many jobs as they create. Second, only about 3 percent of small-business owners fall into the upper-income tax brackets that would increase if, as Obama has proposed, the Bush tax cuts are allowed to expire. And third, many businesses counted as small aren’t engaged in traditional small-business activity. Instead, they are partners in hedge funds, law firms and private-equity shops, or they are highly paid actors, athletes, speakers and authors.
Small businesses are being drawn into the political discussion because of the way they are structured. To avoid paying corporate income taxes, many small-business owners report profits on their individual tax returns. These “pass-through” entities include sole proprietorships, partnerships, limited liability companies and S corporations. Some of them are very profitable, but a large number aren’t what most of us would consider a small business, such as a dry cleaner or coffee shop.
One reason for the confusion is that there is no universal definition. The U.S. Small Business Administration counts companies with as much as $35.5 million in sales and 1,500 employees, depending on the industry. Outside government, companies with less than $7 million in sales and fewer than 500 employees are widely considered small businesses.
Two recent reports by Ernst & Young LLP -- one commissioned by the S Corporation Association and another by the National Federation of Independent Business -- took the broad view. They concluded that pass-through companies accounted for almost 95 percent of all business entities in 2008 and employed 54 percent of the private-sector workforce. Romney’s debate-night assertion that the tax increase would cost 700,000 jobs stems from these studies.
Such findings, though, are at odds with those of several other studies, including one in 2011 by the U.S. Treasury Department. It attempted to better define small business by looking at criteria such as income, labor, and other business expenses and tax deductions. Its conclusion: “Many filers are not engaged in business activity as it is traditionally understood.” Just 20 million of the 34.7 million filers reporting pass-through income qualified as a small business, Treasury said. Of those, about one-fifth qualified as an employer.
The small business spin is pretty transparent. As Chris Hayes notes in Twilight of the Elites Americans' trust in large institutions is at an all-time low -- whether it's big business or "big government." But a Gallup poll taken in early 2010 found that more than 90 percent of the population still held a favorable view of “small business.”
Now, conservatives can read polls and have long spun the most egregious corporatist policies as extending a helping hand to “small business.” Don’t think about Enron, they say. Look at how these tax cuts are helping the mom-and-pop grocery down the road. A perfect example of this meme came during the debate over George W. Bush’s budget-busting tax cuts.
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