Small Businesses, the Top Two Rates, and the Presidential Debate

October 8, 2008

In last night's debate, John McCain made the following claim regarding small businesses and how they would be hit by Sen. Obama's tax cuts:

Sen. Obama's secret that you don't know is that his tax increases will increase taxes on 50 percent of small business revenue.

This claim stems from the fact that under a definition of small business that says that a tax return is a small business if it has $1 in gains or losses on Schedules C, E, or F, those small businesses in the top two marginal tax rates earn about 56 percent of total small business income.

Now technically, the tax increase would not be on 50 percent of small business income because even if you assume it was the small business income that was the last dollar earned, much of that small business income is still taxed at rates below the 33 and 35 percent brackets, even though those taxpayers' last dollar of income was taxed in the 33 or 35 percent bracket.

The Tax Foundation is currently working on releasing statistics pertaining to small business and the presidential plans under various definitions of small business.


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