Millionaire’s surtax would hit the top 1 percent of small businesses

Senate Democrats are pushing a 3.25 percent surtax on millionaires to pay for the extension of the payroll tax cut for all Americans—a proposal that Republicans claim would be a “job-killing tax hike on small businesses,” according to House Speaker John Boehner’s spokesman, Michael Steel.

The millionaire’s tax would indeed affect about 30 to 40 percent of business income that’s reported on individual tax returns, rather than on corporate tax returns. But that income is concentrated among a very small group of small businesses. The tax would only affect about 1 percent of those the Treasury Department classifies as “small business owners.”

(SOURCE: AP ) Just 2 percent of all business owners who file taxes through individual returns—including sole proprietorships, limited liability corporations, S corporations, and partnerships—have taxable income that’s more than $1 million, according to an August 2011 Treasury report. And just about 1 percent of those Treasury categorizes as “small businesses owners” would be affected by the Democrats’ proposed millionaire’s tax —about 273,000 in total. That number drops even further—to 51,000—if you define “small business owners” as those earning at least 25 percent of income through their firm.

Such findings are in line with independent analyses of small business “millionaires” as well. The non-partisan Tax Policy Center—a partnership between Brookings and the Urban Institute—calculates that 1 percent of those reporting business income via individual returns in 2011 would be subject to the millionaire’s tax, about 340,000 in total.

On the whole, it’s “pretty small numbers” of small businesses that would be affected by the millionaire surtax, and it’s uncertain what the effect of taxing them would be, says Roberton Williams, a senior fellow at the Tax Policy Center. “We don’t know a lot about them. Is this really a group that’s going to have a large effect on employment and change their behavior because of taxes?”

Williams compares two kinds of small business millionaires that could be affected by the surtax: a boutique law firm or hedge fund, which are “little employers that are not going to be big,” and a franchised pizza chain, which could hire people if it had more money in its pockets. The tax might affect jobs in the second case, but not in the first. And as my colleague Brad Plumer has pointed out, only a small slice of small businesses overall are creating new jobs.

The GOP counters that the most successful small businesses are most likely to be the ones to create new jobs, giving their capacity. So even if the surtax affects just 1 percent of small business owners, why tie their hands behind their backs? “Obviously, more successful small businesses create more jobs. But why would we want to make it harder for any small business to invest and hire with unemployment at nine percent?” Steel tells me.