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Biden and Ryan dispute economic toll of raising the top tax rates — but both are correct

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One of the most politically charged small business matters resurfaced during the vice presidential debate when Paul Ryan and Joe Biden squared off on the connection between high-income tax rates and job creation.

The contention centers around the fate of the Bush-era tax cuts that are set to expire at the end of the year. The administration wants to extend the current tax breaks for the middle class but allow them to expire for families earning more than $250,000 a year, while Republicans support reissuing the cuts for all Americans.

On Thursday, reiterating the framework around which his party has posed the tax question, Ryan warned that allowing the cuts to expire for high-income earners would strike an especially heavy blow to successful small business owners, many of whom pay pass-through income taxes. That, he said, could discourage them from creating new jobs at a time when the country can least afford their hesi­ta­tion.

“The average tax rate on businesses in the industrialized world is 25 percent, and the president wants the top effective tax rate on successful small businesses to go above 40 percent,” Ryan said.

Biden responded by noting that “97 percent of small businesses in America make less than $250,000” a year; thus, only 3 percent of small firms would be impacted by the president’s budget proposal. Ryan’s retort: The Obama plan “taxes a million small businesses, who are our great job creators.”

The candidates fired those same salvos back and forth, each repeating their respective claims — 1 million affected and 97 percent unaffected — three times before the moderator pivoted to discuss sequestration.

So which figure was accurate, and whose argument, in Biden’s words, was full of malarkey?

Actually, they’re both right.

In its analysis of the president’s proposal, the nonpartisan Joint Committee on Taxation concluded that roughly 3 percent of business owners would pay higher tax rates if breaks expired for high-income earners. The Treasury Department’s Office of Tax Analysis offered nearly the same estimate, reporting that only 4 percent of small firms paid the top rates in 2007, the most recent year for which data is available.

But how many businesses are included in that 4 percent? The Treasury Department’s definition of small businesses used in the report accounts for roughly 24 million companies — 4 percent of which comes to 958,000 small businesses, fairly close to Ryan’s number.

Same research, same data — simply presented in a starkly different light by the two candidates.

The subsequent tax debate hinges on the likely economic impact of raising the tax burden on those 958,000 (or, of course, 4 percent of) small business owners. An Ernst & Young study earlier this year estimated that those firms currently account for more than half of small business revenue and create a disproportionately high number of net new jobs; as a result, lifting their tax rates could cost the country upwards of 700,000 jobs.

On the other hand, several economists have questioned the link between lower tax rates on business owners and increased hiring tendencies, most suggesting there isn’t enough data available that correlates small business income levels with small business job creation.

The presidential candidates may have an opportunity to reignite the tax battle when they return to the stage on Tuesday in New York. Mitt Romney currently holds the advantage among small business voters, according to a poll released earlier this week, but the president has closed the gap considerably since August. More importantly, while Obama appears to have a slightly easier road to the presidency, his challenger has opened up a significant lead in some of the most closely contested states.

Follow J.D. Harrison and On Small Business on Twitter.

Related: Small business trumpeted early and often in Denver

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