Fact Checking Minority Leader Boehner’s Claims on “Small Business” and the “Bush” Tax Cuts

Today, House Minority Leader John Boehner took aim at the economic policies of the Obama administration. In a speech to Cleveland area businesses, Boehner grabbed headlines by calling on the president to wipe clean his current economic team, notably Treasury Secretary Timothy Geithner and Lawrence Summers, head of the National Economic Council.

In the speech, Boehner also called on the expiring "Bush" tax cuts to be made permanent. In doing so, he recited the typical Republican talking point about how letting the tax cuts expire would hurt "small business." Boehner said:

According to an analysis by the non-partisan Joint Tax Committee, Congress's official tax scorekeeper, half of small business income in America — half — would face higher taxes under the president's plan.

Boehner wrong on two counts

Unfortunately, Boehner misrepresented the JCT report, which actually said this:

The staff of the Joint Committee on Taxation estimates that in 2011 just under 750,000 taxpayers with net positive business income (3 percent of all taxpayers with net positive business income) will have marginal rates of 36 or 39.6 percent under the President's proposal, and that 50 percent of the approximately $1 trillion of aggregate net positive business income will be reported on returns that have a marginal rate of 36 or 39.6 percent.

First off, the businesses that JCT is referring to are not necessarily "small." Saying the word "small business" sounds good to the electorate because it brings up an image of a mom and pop store on Main Street America. But plenty of large businesses, as defined by net income or gross receipts, file their taxes under the individual income tax as opposed to the corporate income tax. Merely because a business is paying individual income taxes as opposed to corporate taxes does not mean it is "small."

(Personally, I don't follow why tax policy should so strongly favor one type of business — large or small — over another, but that's an issue for another day.)

Second, even if you take off the word "small" from Boehner's quote, it is still a misreprentation of JCT's report. JCT said that approximately half of business income is earned by tax returns whose last dollar is taxed under the individual income tax. If a single person earns $201,000 in income, all from his small business, not all of that income would be taxed at the higher tax rates if the Bush tax cuts were to expire. JCT was merely classifying tax returns by the tax rate they pay on their last dollar of income and then presenting statistics about tax returns in those groups. Again, even if you are in the top tax bracket, that does not mean all of your income was taxed at the highest rate.

(This "cake effect" of a graduated income tax is one reason that supply-side economists didn't really cheer much for the creation of the 10 percent bracket. For the most part, it gave tax returns a lump-sum tax cut that is economically equivalent to writing a check as opposed to lowering taxes at the margin and thereby removing existing distortions in the tax code.)

Democratic response

On the other hand, many on the left have countered the Republican business tax hike line like that used by Boehner with a cherry-picked soundbite of their own, which is that only 2-3 percent of businesses would be hit by allowing the Bush tax cuts to expire. That's true (under a relatively broad definition of small business), but Republicans are correct to point out that a much larger fraction of business income would be hit than 2-3 percent. They are not the same statistic and should not be used interchangeably like one liberal blogger does here.

There are two main reasons that those tax returns that would be hit by the Bush tax cuts expiring have a disproportionate share of the business income: (1) Higher income tax returns tend to have a large share of income regardless of the source (that's why they are high-income) and (2) Higher income tax returns are more likely to have significant amounts of business income. Again, it may not necessarily be "small" business income, but it is income derived from business activity.

Now how much does the taxation of business income actually matter to both short-term and long-term economic growth? That's another question.