the WHITE HOUSEPresident Barack Obama

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Getting the Facts on Tax Cuts

Summary: 
President Obama's tax proposals won't hurt small business. Here are the facts.

Recently there’s been renewed debate about whether Republicans will stick by their insistence on holding the middle class tax cuts that are scheduled to expire at the end of the year hostage so that they can continue big tax cuts the wealthiest 2 percent of individuals. The President believes we must end the tax rates for the wealthiest Americans and make them permanent for every family bringing in less than $250,000 a year. 

There’s a simple choice to make. We can either make investments in education, transportation, and new sources of energy – the types of investments that have always been essential to America’s businesses and to creating good middle class jobs.  Or we can cut taxes even more for wealthy Americans who don’t need them and didn’t ask for them. We tried this in 2001 and 2003, and what we got was the slowest job growth in half a century, and the typical American family actually saw its income fall.

Unfortunately, Republicans in Congress this week continued to use tired, false claims about the President’s approach to distract from their insistence on holding the middle class tax cuts hostage so they can give the very wealthiest individuals a tax cut we can’t afford. Just like they continue to push the same failed policies that got us into this mess into the first place, Republicans in Congress continue to push old, proven-false claims that ending these tax cuts for the wealthiest will hurt our nation’s small businesses and hurt the economy. Just today Speaker Boehner said, “We believe it’s time to extend all of the current tax rates because it really will provide certainty for American job creators.” Well, we’ve heard this before, but let’s debunk these claims once again. 

Let’s get at the facts:

Countering Claims That The President’s Tax Proposals Would Hit Small Business

  • First, what Congressional Republicans Define as “Small Businesses” are Predominately Millionaires and Billionaires, Corporate Law Partners, Hedge Fund Managers.Congressional Republicans define as small businesses any individual who receives “small business income”. Under this definition:
    • Over half of the 400 Highest Earners in the United States Would Be “Small Businesses”: According to IRS data, in 2009, among the 400 taxpayers with the highest adjusted gross income – group that averages over $200 million each in taxable income – at least 237 would have qualified as “small businesses” under this definition.
    • Hedge Fund Managers and Law Firm Partner are “Small Businesses”:It counts any type of partnership income, proprietor income, or S corporation income as “small business” income. That includes:
      • income received by partners in law firms – each and every one of whom would be considered a “small business” under this definition
      • income received by partners in hedge funds – each and every one of whom would be considered a “small business” under this definition
      • passive income on investments
      • income from renting out a property like a vacation home.
    • This is why, last time Republican Congressional Leaders tried this argument they couldn’t produce one so called “small business job creator.” Last fall, when the GOP was blocking measures of the American Jobs Act that could have supported over a million additional jobs; they argued that asking millionaires and billionaires to pay their fair share would hurt “small business job creators.”  But after pressed by independent media outlets such as National Public Radio, Republicans in Congress and their wealthy allies could not produce a single millionaire job creator for NPR to interview. [LINK]
  • Second, even under the GOP’s own flawed definition of small business, approximately 97% of taxpayers with small business income would be completely unaffected by the President’s plan: According to estimates by Tax Policy Center, about 97% of taxpayers reporting business income would not be impacted by the President’s tax proposals -- which only affect those earning over $250,000.
  • Third, the GOP’s so called “small business” tax proposal would discourage firms from actually creating jobs this year, while giving away tens of billions of dollars to millionaires and billionaires. The legislation sponsored by Majority Leader Cantor and passed by the House of Representativesprovides across-the-board tax cuts (a 20 percent deduction) to certain “small business” owners, including anyone with self-employment income who employs anywhere from zero to 500 workers – even to when they lay off workers or reduce pay.
    • This credit actually discourages hiring and investment because new employees and expenses count against income, so companies get a smaller benefit for expanding their payrolls and investing in their businesses.
    • In addition, the benefits are dramatically skewed - half of the $46 billion cost goes to those making more than $1 million.
    • The biggest beneficiaries are not small businesses employing workers, but the wealthiest Americans - like law partners and investment managers, the so called “small business job creators” republicans in congress claim would be hurt by the President’s position.
  • President Obama, building on a record of the 18 small business tax cuts he already has signed into law, has a plan to help 2 million actual small businesses hire workers and make new investments.The President has called on Congress to pass legislation that gives a 10 percent income tax credit for firms that create new jobs or increase wages in 2012 and that extends 100 percent expensing in 2012 for all businesses.
    • Encourage an additional $200 billion to $300 billion in new wages and jobs this year with a Small Business Jobs and Wages Tax Credit:
      • Credit for New Wages:  The plan would provide firms with a 10 percent income tax credit for new wages added in 2012. This would encourage both new hiring and providing raises to existing workers. The credit would be limited to $500,000 per firm in order to focus the benefit on actual small businesses. 
      • Focused on Middle Class Workers: Because the credit is based on Social Security wage base, companies would receive no credit for increasing wages above $110,100. Unlike the House Republican proposal, the President’s proposal ensures that companies that offer raises only to already well-paid executives would be ineligible for the tax relief. 
      • Directly tied to new hires and pay increases:  Because the credit is tied to increases in payroll, the benefit is only available only to companies that make new hires or offer employee pay-raises – directly encouraging growth and jumpstarting hiring. This stands in contrast to proposals put forward by Congressional Republicans that would cut taxes of hedge fund managers, law partners and many of the wealthiest Americans regardless of whether they employed or hired a single worker.
      • Helps 2 million Small Businesses: This credit would help nearly 2 million actual small businesses with employees.
      • More than $20 billion in tax relief to encourage an additional $200 to $300 million in new wages and jobs: The President’s plan will provide more than $20 billion in direct tax relief targeted to small businesses in 2012 and 2013, according to a score from the independent, non-partisan Joint Committee on Taxation. This $20 billion in direct tax relief could encourage an additional $200 billion to $300 billion in new wages and jobs this year. 
    • Support business investment this year with 100 percent expensing for 2012:  The President is proposing an extension of the 100 percent expensing provision that he signed into law in December 2010, which rewards firms for making investments by allowing them to deduct the full value of those investments through 2012. Extending 100 percent expensing for an additional year would put an additional $50 billion in the hands of businesses in 2012 and 2013. Most of this relief would be recouped by the Treasury as businesses regain their strength.
      • What Others Have Said About Expensing:
        • The National Federation of Independent Business called expensing a “big victory” for small business: “Bottom line – just about every small business can write-off the full amount of investments they want to make in 2010 and 2011.” (December 2010).
        • In a 2010 letter signed by the U.S. Chamber of Commerce, more than 80 business groups – representing industries from aerospace and wireless to builders, contractors, and retail stores – wrote that “bringing back bonus depreciation will encourage companies of all sizes to invest in newer, more efficient, and more environmentally-friendly equipment, which will help large and small businesses alike.”

 

 President Obama's Plan for Small Business Tax Cuts Compared to the House Republican Plan

 
 

President Obama's Plan

 

House Republican Plan

 
 

Targeting small business

Targets relief to 2 million real small businesses with employees

 

 

Biggest beneficiaries are not small businesses employing workers, but the wealthiest Americans - like law partners and investment managers

 

Who it helps

Focused on middle-class workers, because the credit doesn't apply to wages above $110,100.

 

 

The benefits are dramatically skewed - half of the $46 billion cost goes to those making more than $1 million

 

Jobs and growth

Provides a direct incentive to hire new workers

 

 

Actually discourages hiring and investment because new employees and expenses count against income, so companies get a smaller benefit for expanding their payrolls and investing in their businesses.