Claim that small business are taxed higher than corporations is “mostly false”

February 11, 2013 at 9:00 am

On NBC’s “Meet the Press” last month U.S. Representative Paul Ryan discussed the issue of small businesses and tax reform. Here is one of the things he had to say:

They [small businesses] believe we should have tax reform. We have the highest corporate tax rate in the world. We’re taxing our small businesses now at rates higher than corporations. We should have lower tax rates so we can be competitive.

PolitiFact decided to investigate whether this is true or not, and their answer is that while some small businesses would see an increase in taxes due to the American Tax Relief Act of 2012 (part of the deal signed in January to avert the fiscal cliff), the vast majority are not reporting incomes anywhere near the top tax bracket, making Ryan’s statement “mostly false.”

Ryan is right when he says that the U.S. corporate tax rate is the highest statutory corporate tax rate in the world at 35 percent.  However, he’s only right about the statutory tax rate– what the rate is on paper– but not about the effective tax rate, which is what the rate is in reality, after accounting for the variety of credits, deductions and other ways that taxes are lowered.  Think Progress reports that the effective corporate tax rate was actually 12.1 percent in 2011– a historic 40 year low. This is much lower than the rate in other countries, and consequently the U.S., despite having a high statutory rate, raises much les revenue from corporate taxes than other countries.

Now, what about small businesses? The American Tax Relief Act raised the top personal tax rate to 39.6 percent. Many small businesses are structured as “pass through” entities, and report their business incomes as personal incomes– this is why Ryan is claiming now that small businesses are going to be taxed at a higher rate than the corporate 35 percent rate. But when you look at what kinds of businesses are pass-throughs and which ones would be affected by the increase in the top personal income tax rate, there are very few small businesses that would be affected.

The U.S. Treasury reported that only 2 or 3 percent of pass through entities fall in the top personal tax bracket.  It also found that half of small business have total income less than $50,000, and 90 percent of small businesses had net income of less than $50,000.  The rate increase to 39.6 percent only applies to those with incomes above $450,000.  Clearly, most small businesses would certainly not be in the top tax bracket.

Rep. Ryan’s statement makes for a good sound bite, but it’s faulty logic is misleading and distorts reality. Broad statements about what small businesses need, or how they will be impacted by public policy, are built on certain assumptions and influenced by political perspectives. This discussion only underscores the importance of questioning when the words “small business” come up in any political discussion, whether spoken by a Democrat or Republican.  What we have seen lately, as evidenced here, is that the needs and perspectives of small businesses get lumped together with big business interests to serve a broader political agenda. In reality, while they can work together to strengthen the economy, big and small businesses have very different needs, challenges, and roles in our local and national economies. Public policy decisions need to take these differences into account in order to create a level playing field for all businesses to grow and thrive.

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Entry filed under: Economic Development, Economy, Small Business. Tags: , , , , .

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