Obama, GOP debate small-business tax

This year’s debate over extending President George W. Bush’s tax cuts has turned into a brawl over which party is doing more for small businesses, with assertions that the health of the economy and thousands of future jobs are at stake.

As often happens, both parties are making valid points drawn from a selective reading of the facts, while neither side is revealing the whole, complex picture surrounding the link between small-business taxes and job growth.

Republicans repeatedly accuse Democrats of planning to raise taxes on the small businesses that typically play a disproportionate role in creating millions of jobs each year. They cite as evidence a paper released in July by the Joint Tax Committee, which estimated that 50 percent of about $1 trillion in business income next year will be taxed at the two highest rates if the Bush tax cuts are allowed to expire Dec. 30.

That will leave businesses with less money to hire, Republicans say.

But the paper also supports the Democratic counterargument that only a small proportion of taxpayers who report their business income as personal income — 3 percent, or fewer than 750,000 — will be subject to the higher rates under President Obama’s plan. The president wants to extend the tax cuts — except those for a relatively small number of single people earning more than $200,000 and married couples earning more than $250,000.

The Joint Tax Committee explains the seeming contradiction by pointing out that not all of the businesses that report income on personal tax forms — and thus are subject to the higher tax rates — meet a common definition of a small businesses. In 2005, the committee said, nearly 20,000 such businesses had revenues exceeding $50 million.

Those businesses apparently are the ones generating most of the income that is subject to higher taxes.

Just back from his vacation on Martha’s Vineyard, Mr. Obama wasted no time in resuming the debate. Appearing in the White House Rose Garden on Monday, he accused congressional Republicans of holding “hostage” a key bill that would promote lending to small businesses.

Congress’ “first order of business” when it returns from its summer recess should be to pass a measure aimed at enticing community banks to lend more to credit-strapped small firms, the president said.

“Holding this bill hostage is directly detrimental to our economic growth,” Mr. Obama said. “So I ask Senate Republicans to drop the blockade.”

While economists agree that Congress should do more to help small businesses obtain loans, Republicans filibustered the bill just before the Senate adjourned for its five-week break on the grounds that Democrats had added nonessential spending and were refusing to allow Republicans to offer many amendments.

In particular, Republicans wanted to have a debate on a measure providing regulatory relief to small businesses by repealing a provision in the health care bill forcing them to compile extra paperwork to prove compliance with the tax laws.

Senate Minority Leader Mitch McConnell, Kentucky Republican, returned to the tax debate Monday, saying the GOP remains determined to keep all the Bush-era tax cuts in place to help small businesses.

Small-business groups and many Republicans vehemently insist that the president’s plan would “kill” small businesses and the jobs they create. The president would allow the top two tax rates of 33 percent and 35 percent to revert to Clinton-era levels of 36 percent and 39.6 percent, respectively.

The National Federation of Independent Business — the leading representative of small businesses — said its surveys show that the businesses most likely to face tax increases are those with 20 to 250 employees. But the federation conceded that those employers currently employ less than 25 percent of the total work force.

“The vast majority of small businesses will be unaffected,” said William G. Gale, an analyst at the Brookings Institution.

He said most of the people potentially hit by the tax increase don’t earn the majority of their income through their businesses. These top earners typically have many other sources of income, including salaries, bonuses, stock grants, capital gains and dividends.

“If the objective is to help small businesses, continuing the Bush tax cuts on high-income taxpayers isn’t the way to go,” Mr. Gale said. “It would miss more than 98 percent of small-business owners and would primarily help people who don’t make most of their money off those businesses.”

John Kartch, an analyst at Americans for Tax Reform, said the way businesses are organized seems to make a difference. The smallest businesses usually are organized as “sole proprietors,” have lower incomes and would not be affected as much by the rate increases.

But a vital sector of somewhat larger businesses organized as partnerships and “S chapter” corporations under the tax law would be hit hard, he said. These businesses, which include law firms and venture capital firms, also report their income as personal income on their tax returns and are subject to the highest rates.

The number of partnerships and S corporations has been growing, according to the Internal Revenue Service, because businesses see it as a good way to avoid double taxation of their income or profits. That may explain why many larger companies are now found in what once was mostly a “small-business” category of the tax code.

Citing IRS figures, Mr. Kartch said that virtually all of the profits of some 8 million partnerships and S corporations would be taxed at the higher rates under Mr. Obama’s plan.

He said doctors’ and dentists’ offices are examples of the kinds of businesses that would suffer the most.

“These are real small businesses,” Mr. Kartch said. “Raising taxes on these most successful of small businesses will cost jobs.”

While arcane facts about small businesses are bandied about, sentiment inside and outside Congress seems to be getting stronger for maintaining all the tax cuts, if only as a precaution to avoid damaging the increasingly fragile economic recovery and employment market. Employers have only tentatively begun to add jobs this year.

Economists in general favor at least a temporary extension of all the cuts so as not to disrupt the economy. Prompting concern was a recent Labor Department survey that found that businesses with fewer than 50 employees — which normally create as much as 75 percent of all jobs — accounted for 62 percent of all job cuts and only 54 percent of new jobs at the end of last year.

In light of the deteriorating job situation, a survey by the National Association of Business Economists found that 54 percent of economists support extending all the tax cuts.

Another 33 percent say Congress should follow the president’s plan and extend only those for the middle class. These economists also largely support extending the dividend and capital gains tax cuts that expire at the end of the year.

“The tax cut is important for small businesses,” said Sung Won Sohn, an economics professor at California State University at Channel Islands. “Many of them earn more than $250,000 and would be paying higher taxes if the cuts are allowed to expire. Often, they have significant dividend income.”

Just as important to encourage hiring, Mr. Sohn said, is for small businesses to have better access to bank loans, as maintained by the president.

“One of the biggest roadblocks is the availability of credit,” Mr. Sohn said. “Many small businesses have been cut off from their local banks and are having difficulty getting credit from their suppliers. Some use personal credit cards to meet payrolls,” though banks also are cutting back on credit lines.

Mr. Sohn said the administration’s approach of using bank-bailout funds to recapitalize community banks that lend to small businesses is one way to open up more credit, as is the administration’s proposal to expand lending by the Small Business Administration.

“The government can play an important and significant role in channeling credit to small businesses,” he said.

• Stephen Dinan and Kara Rowland contributed to this report.