WASHINGTON
— As congressional Republicans and the White House feud over whether to raise
taxes on the wealthy, one interest group has dominated the debate: small
business.
Republicans
want to protect the Bush-era tax rates for the wealthy because, they say,
nearly 1 million small business owners would be subject to the higher levies.
Even some Democrats are sympathetic to the argument and want to maintain the
current rates.
But
in a white-hot debate waged in sound bites and slogans, “small business” has
become a buzz word that doesn’t mean just the size of a firm.
As
Republicans employ the term, a small business is any firm that pays taxes at
the individual rates, a legal structure that most firms elect when they
establish themselves.
While
some small business owners would pay more if the top rates rose, the number is
less than 1 million. A 2011 study by the Treasury Department’s Office of Tax
Analysis showed that 2.4 percent of all small firms, or about 575,000, would
face a tax increase under President Barack Obama’s proposal to raise rates on
households earning more than $250,000.
The
rest, according to the Treasury Department and Joint Congressional Committee on
Taxation, are larger entities set up like small businesses for tax purposes,
but include larger employers such as banks, law firms and construction
companies. They are subject to the individual income tax rates because business
profits flow through to owners.
The
amount of small-employer income subject to higher taxes is about $113 billion,
or 1 percent of all taxable income, according to the Treasury Department.
“You
are going to affect small business owners,” said Mark Zandi, chief economist at
Moody’s Analytics. “But it’s an overstated argument. … It’s not your
mom-and-pop store. Many of them are private-equity firms, celebrities that set
up pass-through entities, hedge funds. There are actually quite few small
businesses that you would think of as a small business generating jobs.”
In
recent weeks, both congressional Republicans and the White House have sought to
enlist small business owners to support their plans. Obama met with a group of
small business owners at the White House last week.
Obama
and House Speaker John Boehner are negotiating over tax rates on top earners as
part of a deal to avoid the fiscal cliff, the $500 billion in tax increases and
spending cuts that begin Jan. 1.
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