With Barack Obama off on his world tour and John McCain withering in obscurity, now's a good time for the Agenda to reflect on the latest domestic policy squabble between the two campaigns. It began in the second week of July, when McCain, in a series of speeches, insisted that Barack Obama would raise small business taxes. Here's a sample: "Small businesses are the job engine of America, and I will make it easier for them to grow and create more jobs....If you are one of the 23 million small business owners in America who files as an individual rate payer, Senator Obama is going to raise your tax rates." On the other hand, the Tax Policy Center has published data that suggests that most small business owners will actually get a tax cut under Obama's plan -- in fact, a bigger tax cut than they would get under McCain. (The Tax Policy Center is a project of the Urban Institute and the Brookings Institute, two organizations that most people consider center left; Obama's senior economic adviser holds a position at Brookings.) So who's right?
Well, McCain is certainly, unequivocally wrong that Obama will raise taxes on 23 million small businesses. Let's begin by establishing the figures. According to Census Department (as reported by SBA), in 2005 there were some 26 million firms with 500 or fewer employees. (McCain's figures apparently come from 2002.) Of these, 20 million have no employees at all. Many of these are glorified hobbies, others are lucrative consulting gigs, but as the nonpartisan Factcheck.org points out in a thorough debunking, "McCain is arguing that Obama's tax increase would 'destroy jobs,' but he's counting mostly firms that don't produce any."
Obama has promised to repeal the Bush tax cuts on couples making more than $250,000 and individuals earning over $200,000 -- basically, all of the top tax bracket and reaching halfway down the second-highest tax bracket. And how many small businesses would that affect? The Tax Policy Center calculates the number of tax filers ("units," it calls them) in each bracket who reported some small business income or loss, and in 2007 that amounted to just 481,000 units -- just 1.5 percent of all those who reported small business income. (The Tax Policy Calculates that 32 million tax units had small business income, which includes straight business or farm income, or income passed from partnerships or S-Corps.) And that number is undoubtedly high, because many filers in the second highest (33 percent) tax bracket earned less than Obama's proposed threshold. Others are professionals -- lawyers or accountants, say -- who've organized their practices into partnerships. In any case, the vast majority -- around 99 percent -- of small businesses, however you define them, would not see their taxes increased under Barack Obama's scheme.
A more interesting question is whether small businesses would actually see a bigger tax cut under Obama or McCain. Again, if the number-crunchers at the Tax Policy Center is to be trusted, then the laurels go to Obama, who's proposing a variety of additional tax cuts targeted toward low-income and working families. (Here is the analysis, which includes very detailed descriptions of the candidates' proposals. More detailed, in fact, than the candidates' own position papers. Because the candidates haven't fully fleshed out their tax proposals publicly, the Center has talked informally with campaign advisers and made its own assumptions to fill in the blanks.) Anyone earning under $112,000 in 2009 -- or 80 percent of the population -- is more likely to see a higher after-tax income under Obama than under McCain. That's either within the 25 percent or 28 percent tax bracket, depending on whether you're filing individually or jointly, and somewhere between 68 and 91 percent of those tax units projected to report small business income in 2009.
People making between $112,000 and $161,000 will do a little better under McCain than under Obama. Above that, and the advantage turns decisively toward the Republican. Those in the top one percent of income -- that is, those who'll make over $603,000 -- will see their after tax income drop by nearly nine percent in an Obama Administration. It would rise by nearly four percent under McCain's plan.
McCain's campaign hasn't, as far as I know, disputed the Tax Policy Center's analysis. Still, some small business advocates are skeptical. "I would think McCain's plan is more small-business friendly," Cap Willey, the past-chair of the National Small Business Association, told me. "A large number of small businesses that they're citing probably come from IRS statistics, and would probably include everybody who puts a Schedule C on their tax return. I don't think we're talking about them. I'm really worried about the successful small business that hires people." Grover Norquist, the uber-conservative operative and president of Americans for Tax Reform, made a similar argument on Politico.com. Of the $706 billion in small business income reported to the IRS in 2006, "about half was reported by households in the top marginal income tax rate. Interestingly, two-thirds of this income was reported by households making $250,000 per year or more," he wrote. "The Obama campaign maintains that the number of small-business owners is what's important. Economists know what matters is the tax rate that's applied to the bulk of small-business income."
I think that's debatable -- a fair point, certainly, but economists are divided on the merits of the Bush tax cuts for the very wealthy. Good economics doesn't always make for good policy. It often doesn't make for good politics.* If you're one of those entrepreneurs whose business isn't so lucrative, which tax cut would you rather have?
* That cuts both ways, incidentally. In one speech McCain, besides slandering Obama and his tax plan, mentioned his own proposal for a summer gas tax holiday. Unlike repealing the Bush tax cuts, this idea has been universally condemned by people who study these things (as well as Obama), and McCain borrowed from Hillary Clinton's playbook. "Some economists don't think much of my gas tax holiday," he said. "But the American people like it, and so do small business owners."