[Corporations] FW: Puncturing a Republican Tax Fable

[Mike Spears]

http://www.factcheck.org/article.aspx?docID=118

Puncturing a Republican Tax Fable
GOP fact-twisters claim 80% of the tax relief given to the rich goes to job-
creating small businesses. Dont believe it.

December 19, 2003
Modified: December 19, 2003

Summary


This fairy tale was re-told most recently by Republican National Chairman Ed
Gillespie when he said in a Dec. 3 speech: 80% of the tax relief for upper
income filers goes to small businesses. Its untrue  and a classic example of
a statistical distortion gone amok.



It may be true that 79% of upper-income taxpayers have some income from
business, but Gillespies definition of small business actually includes big
accounting firms, law firms and real-estate partnerships, and businesses
that
are really only sidelines  such as occasional rental income from a corporate
chiefs ski condo. In fact, tax statistics show that upper-income taxpayers
get
far more of their income from salaries, capital gains, stock dividends and
interest than they do from small business.

Analysis



By twisting statistics and over-hyping, Republicans are spoiling for
themselves
what would otherwise be a perfectly serviceable argument: lowering taxes on
the
most affluent Americans does indeed lower taxes on many small businesses,
and
thus creates more jobs. But not nearly as many as Gillespie and some other
Republicans are claiming.

It is undisputed that that many small-business owners report profits from
their
companies on their personal income-tax returns and not on corporate returns.
Its also true that small business is a major source of new jobs, and
economists generally agree that lower business taxes eventually tend to
produce
more hiring. So cutting the top tax rate probably does stimulate some small-
business hiring. But how much? Nothing close to 80%, it turns out.

Where Top Taxpayers Get Their Income

(Average share of income from different sources to those paying the highest
tax
rate of 35% in 2003)

Wages & Salaries
 47.1%

Interest, Dividends, Capital Gains
 25.8%

Business
 22.2%

Other (Pensions, Alimony, etc. )
 4.9%

Source: Tax Policy Center Table 16: Composition of AGI by Tax Bracket, 2003

The 80% claim originated last May with a report by the Republican staff of
the
Joint Economic Committee of Congress, where it was prepared as ammunition
for
the debate over the second Bush tax-cut bill which eventually became law
later
in 2003.

That report concluded that 79% of the highest-income Americans have some
business income. Then the report made a huge leap, claiming These small
business owners would receive 79 percent of the  tax savings from cutting
the
top tax rate. But wait a second  very few of those small business owners are
really running dry-cleaning stores. A Republican committee staff member
confirmed to FactCheck.org that their report is counting anybody who made
even
one dollar of profit from a hobby business as a small business owner if they
reported that income on Schedule C of their federal income-tax returns.

Their method also counts as a "small business owner" any member of an
investment club -- someone who put $50 a month into a pool to buy stocks
with
friends and then reported a few dollars of dividends and capital gains on a
K-1
form from the partnership at the end of the year.

And thats not all. Also counted as small business owners would be:

--A corporate executive who made $500,000 in salary and bonuses, and who
also
had $3,000 in income from renting out his yacht.

--A TV anchorwoman making $1 million in salary and reporting $25,000 in
speaking fees as Schedule C income.

--A partner in a national accounting firm who has no side business at all,
but
who gets a big chunk of his income as a share of the giant partnerships
profits.

Its silly to call any of these small business owners, but Gillespie went
even beyond what the report said. He said 80% of the tax relief went to
small
businesses , (as opposed to owners). Not even the Republican staff report
can back that statement.

So how much of the benefit really goes to small business? According to an
analysis by the nonpartisan Tax Policy Center, done at the request of
FactCheck.org,  business income accounts for just over 22% of the income
that
will be reported this year by the most affluent American households. Those
upper-income taxpayers actually get more from interest, dividends and
capital
gains than they get from business income, but Gillespie said nothing of the
tax
benefits on that score.

Both the Republican study and the Tax Policy Center focused on the same
group
of elite taxpayers -- those paying the top income-tax rate. (That's the rate
which dropped to 35% this year from the previous level of 38.6% under the
most
recent tax cut.) In an earlier look at the same group, the Tax Policy Center
found that roughly three out of four taxpayers paying the top rate got less
than half their income from business. Thats a fact that some Republicans
continue to ignore as they spin their small-business fable.

Sources



How the Top Individual Income Tax Rate Affects Small Businesses Republican
Senate staff, Joint Economic Committee, US Congress 6 May 2003.

Ed Gillespie, Chairman, Republican National Committee Remarks Prepared for
Delivery: St. Anselm College, Manchester, NH  3 Dec 2003.

Table 16: "Composition of AGI by Tax Bracket, 2003" Tax Policy Center
(Washington DC) 18 Dec. 2003.

Table 7: "Distribution of Returns With Small Business Income, 2003",
published
in: Leonard E Burman, William Gale & Peter Orszag Tax Break: Thinking
Through
the Tax Options Tax Analysts 19 May 2003: 1092.


Text of RNC Chairman Gillespie's Dec. 3 speech



Misleading Republican staff document claiming 79% of tax relief to
upper-income
taxpayers goes to "small business owners"

 (.pdf - K)
Tax Policy Center table showing that those paying the top federal income-tax
rate get only 22.2% of their income from business sources

 (.xls - 22 K)
Tax Analysts article with Table 7 showing 74% of those who pay highest
federal
income-tax rate get less than half their income from business

 (.pdf - K)
--
Copyright 2004 Annenberg Public Policy Center of the University of
Pennsylvania