At the heart of the debate is whether tax rates should increase for top-end taxpayers, as Obama has long urged. Most small businesses pay taxes according to individual rates, not corporate rates, so some firms would see their taxes increase if upper-end rates are raised.
“Raising tax rates will hurt small businesses at a time when we’re expecting small businesses to be the engine of job creation in America,” House Speaker John A. Boehner (R-Ohio) said at a Capitol Hill news conference last week. Boehner, who has resisted Obama’s demand for higher taxes on the wealthy, warned that increasing the rates on income over $250,000 would mean higher taxes on business owners representing more than half the country’s small-business income.
But the figure he cites comes from a report by Congress’s Joint Committee on Taxation, which counts many businesses that aren’t actually that small, including big law firms, large companies, hedge funds and private equity firms.
That’s because small businesses aren’t the only firms subject to individual rather than corporate tax rates. Some large and publicly held firms — partnerships, “S” corporations and other “pass-through” entities that collect and distribute income and losses to their owners — also pay taxes at individual rates and would benefit if the top-end tax rates remain low.
Examples are the private equity firms Carlyle Group and KKR, the giant accounting firm PricewaterhouseCoopers and newspaper publisher Tribune Corp.
Obama has countered that small businesses would be better off under his plan to extend lower tax rates for the middle class while allowing rates to rise on income over $250,000 a year.
“I sat down with some small business owners who stressed this point,” Obama said at the White House late last month. If Congress adopted his plan, he said, “families and small businesses would, therefore, be able to enjoy some peace of mind heading into Christmas and heading into the New Year.”
The president has repeatedly said that 97 percent of all small businesses wouldn’t see their income taxes go up at all under his plan. But that figure, which comes from the same report by the Joint Committee on Taxation, relies on one of the broadest possible definitions of a “business,” including workers who are paid as consultants or make small amounts of money from a hobby.