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Claims about the small-business tax cut (Part 1)

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Jim Watson: AFP/Getty Images

“When you hear small business, what comes up in your mind first? The corner drug store, the tech troubleshooting start-up, my daughter’s martial arts instructor. How about Donald Trump — Trump Sales and Leasing — or Paris Hilton Entertainment? What about Larry Flynt Publications? Not that any of these latter companies have volunteered to show me their tax returns, but by all accounts, these are the businesses that will devour the lion’s share of the tax breaks in this legislation. Mr. Speaker, three percent of the businesses in America will get 56 percent of the tax breaks provided. The rich and famous will get most of the money. 125,000 millionaires in America will get 58,000 in tax breaks within their first year of this tax break.”

— Rep. Xavier Becerra (D-Calif.) arguing against the Small Business Tax Cut Act during a House floor debate, April 19, 2012

The Small Business Tax Cut Act would provide a 20-percent tax deduction for companies with fewer than 500 employees. The House passed the measure by a vote of 235-173, and it’s up to the Democrat-controlled Senate now to decide whether the legislation should go to the president’s desk.

Rep. Becerra argued that the “lion’s share” of the $40 billion in tax savings will go to the rich and famous, and he cited some rather infamous people as examples of who would benefit. We haven’t seen the tax receipts for those individuals or their companies, but it’s safe to assume that at least some of their stripe could fit into the federal government’s small-business category and qualify for the tax cut. (Listen to Becerra’s comments with this mp3 from C-SPAN Radio, starting at about the 6:42 mark.)

Still, we wondered how the congressman came up with the notion that the rich and famous would receive the greatest benefit, as though highly profitable landscaping businesses, restaurant owners, construction companies and the like wouldn’t rack up nearly as much in savings.

Since House Majority Leader Eric Cantor (R-Va.) sponsored the bill, we will examine his comments in a follow-up column.

The Facts

Becerra’s staff pointed us to a report from Congress’s nonpartisan Joint Committee on Taxation to prove that the representative’s numbers were correct. The analysis shows that he is right about 125,000 firms making more than $1 million receiving $58,000 in tax breaks during the first year. But let’s look at his assertion that “three percent of the businesses in America will get 56 percent” of the overall savings. (See page 3 of the study.)

The most obvious way to reach the congressman’s 56-percent figure is to combine the wealthiest 8 percent of businesses, which include those making as little as $250,000 per year. The top 3 percent, which Becerra referred to, would pull in a considerably smaller 34 percent of the savings.

The lowest-earning 97 percent of small businesses — all of those making less than $500,000 per year — would receive 66 percent of the savings. That’s clearly a lion’s share compared to the top 3 percent.

How about which single category in the table gets the highest amount? That’s the group of 756,000 businesses making between $250,000 and $500,000. The report shows they would collect 23 percent of the savings.

Democrats generally argue that top earners — we could use the top 8 percent in this case — shouldn’t receive a disproportionate amount of tax savings. Republicans counter that such taxpayers add vastly more to the federal treasury than everyone else, and so it’s perfectly fair to cut taxes evenly across the board.

This is an age-old debate that goes beyond the scope of this column, so we won’t wade into it. Besides, Becerra singled out the rich and the famous as the top recipients of Cantor’s bill, citing Hilton, Trump and Flynt as examples.

The Joint Committee’s table provides no evidence of this, as it doesn’t include a category for rich and famous individuals who also own businesses. Becerra’s statement is a mere assumption based on the fact that some rich and famous people own companies. He failed to shows us any way to quantify exactly what percentage of the tax savings this subsection would receive.

Becerra, who got on the phone to defend his facts, said his main point during the floor debate was that Cantor’s tax bill would benefit more than just job creators. He said the name of the measure conjures up images in people’s minds of small struggling businesses, when it would also provide a boost for some wealthy individuals.

It’s worth noting that one of the congressman’s main criticisms of the bill is that it does not exclude businesses that fire or outsource employees. Cantor has argued back that the legislation limits the total allowable tax deduction to 50 percent of payroll, which could theoretically create an incentive to hire more workers — the more payroll you have, the more you stand to receive.

We should point out that Becerra championed a bill to support small businesses in the past. For instance, he voted yes on the Small Business Jobs Act of 2010, which was meant to increase the availability of credit for small businesses, and which also provided tax incentives for small business job creation.

The congressman didn’t back away from his opposition to Cantor’s bill when we pointed out the errors in his statement. He summed up the measure this way: “It’s disproportionate, poorly targeted, ill-conceived, unpaid for, and it has no requirement to create jobs. It just doesn’t make sense.”

The Pinocchio Test

The report from the Joint Committee on Taxation doesn’t support Becerra’s claim that 3 percent of businesses would receive 56 percent of the tax savings in Cantor’s bill, so the California congressman appears to be wrong about that.

In addition, Becerra provided no solid proof that “by all accounts” the “rich and famous” will devour the lion’s share of benefits. The bottom line is that we don’t know how many of those people own businesses or how much income their firms produce. Just because some of them would benefit from the tax break doesn’t mean they would get the most out of it, and it certainly doesn’t mean they stand to benefit more than the nursery owners, the community newspaper chains, the software start-ups, the commercial printers and so on.

Becerra has brought up some valid points about whether the Small Business Tax Cut Act would apply to just job creators, but he earns three Pinocchios for arguing his case with some unfounded claims.

Three Pinocchios




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