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“Over half of the people who would be taxed under this plan are, in fact, small-business people.”

— House Speaker John Boehner (R-Ohio), Nov. 6, 2011

“The question is whether the federal government ought to be raising taxes on 300,000 small businesses in order to send money down to bail out states for whom firefighters and police work.”

— Senate Minority Leader Mitch McConnell (R-Ky.), Oct. 23, 2011

The top Republicans in Congress appeared on CNN on different Sundays to make similar arguments against the Democrats’ push to raise taxes on people making more than $1 million — that it would adversely affect small businesses.

This is a point which Republicans often make about tax increases on the wealthy — a claim that we have found wanting in the past. We awarded a Pinocchio in April when some Republicans argued that tax hike would hit “half of all small business income.” That’s because when you dig into the data, much of this income is generated by large companies or law firm partnerships, not the “mom-and-pop” stores most people associate with small business.

 But Boehner and McConnell appeared to be saying something different, referring to specific numbers. So this appears to be an entirely new statistic, worthy of exploration.


The Facts

Ironically, Boehner’s spokesman says he misspoke and meant to use the phrase “half of all small business income.” As we said, that is misleading. But McConnell’s staff provided us with a relatively new Treasury Department study that, depending on how you read the numbers, would actually support Boehner’s original formulation.  

In fact, even more strangely, the Treasury conducted the study because it was concerned about the repeated claims about “small business income.” So a group of career economists decided to dig deeper into the data and separate out the entities (such as law firms) that clearly are not small businesses.

 The Office of Tax Analysis study, which focused on 2007 tax data, is embedded below and makes for interesting reading for tax policy wonks. It certainly is a much more precise look at the taxes paid by small businesses.

Treasury Department analysis of small business taxes

The key to McConnell’s statement is Table 14. That shows that there were 392,000 tax returns with adjusted gross income above $1 million. Of that, 273,000 returns were defined as “small business owners” under what the study calls a “broad definition.”  Rounding up, that’s where McConnell gets his 300,000 figure.

Table 14 also would support Boehner’s claim that over half the people taxed as millionaires are “small business people,” since it shows almost 70 percent of millionaire tax-filers meet the broad definition.

 Even so, it is important to note that this is only 1 percent of all small businesses, so only a small sliver of small businesses would be affected by the proposed tax increase.

 Moreover, the study also suggests a “narrow definition” of a small business owner: people who get at least 25 percent of their adjusted gross income from small business income. This actually would seem to get closer to the category of mom-and-pop shops.

After all, the broader definition includes anyone who earned any small business income, even as little as a $1 — which suggests the taxpayer really is not managing the business.

 The narrow definition undercuts Boehner’s and McConnell’s assertions, because it shows that only 51,000 small business owners make more than $1 million. That would be just 13 percent — not one half — of the millionaires taxed under the Senate Democrats’ plan.

 However, the Treasury paper — which was written to generate discussion in tax-wonk world — very carefully avoids offering an opinion on whether the broad or narrow definition is better. But it is unclear to us how anything but the narrow definition could mean the prototypical small-business entrepreneur or “job creator.”  If at least 25 percent of your income is from small business, it suggests you are an active, not a passive, manager of the business.

 McConnell spokesman Don Stewart noted that McConnell more often refers to “300,000 business owners” when making this case against the Senate Democrats’ plan, not making a distinction about “small businesses.” That phrasing would certainly cover the broader definition and is much more accurate.


The Pinocchio Test

 Given that the Treasury paper does not offer an opinion on the preferred definition of a small business, we find it hard to say these statements are worthy of a Pinocchio. But they do not quite meet the requirements of a Geppetto Checkmark either, especially if the implication is that these are truly small businesses. Still, the Treasury study gives new guidance on how to more accurately discuss the impact of tax legislation on small businesses.

So we will give this our rarely used label:



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