FactCheck.org - Annenberg Political Fact Check
FactCheck HomeAbout UsArchivePrivacy PolicyCopyright PolicyContact Us

Puncturing a Republican Tax Fable

GOP fact-twisters claim 80% of the tax relief given to the rich goes to job-creating small businesses. Don't believe it.

December 19, 2003

Modified: December 19, 2003

eMail eMail to a friend Print Printer Friendly Version

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.” It’s 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 Gillespie’s 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 chief’s 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. It’s 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 that’s 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 partnership’s profits.

It’s 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. That’s 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.