The 3% Fallacy

The claim:  Expiration of tax cuts for the rich will affect only 3% of small businesses.

The reality:  “The 3% figure, which is computed from IRS data, is based on simply counting the number of returns with any pass-through business income. So, if somebody makes a little money selling products on eBay and reports that income on Schedule C of their tax return, they are counted as a small business…According to IRS data, fully 48% of the net income of sole proprietorships, partnerships, and S corporations reported on tax returns went to households with incomes above $200,000 in 2007.”

Full article on the small business tax hike here.

Comments (12)

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  1. Bruce says:

    So to put this in perspective, Obama is proposing to raise taxes on almost 50% of small business income. He calls this a tax on the “rich,” but were not talking about the idle rich. We’re talking about job-creating, small business owners.

  2. Tom H. says:

    One other thing rarely mentioned. The income of the rich that Obama wants to levy higher tax rates on has almost certainly already been taxed once, when it was earned as wages. Capital gains taxes and dividend taxes and busniess profits taxes are almost almost always double taxation.

  3. Devon Herrick says:

    From a purely theoretical point of view, the Administration’s policies are perpetuating small businesses by making it too difficult for a small business to grow into a larger business.

  4. Don Levit says:

    I have been participating on the AngryBearBlog, which is fairly liberal.
    They believe that the Social Security Trust Funds were borrowed from to lower the income taxes on the rich.
    Thus, maintaining these tax rates is a justified payback for lower income taxes due to the borrowing.
    By the way, if any of you want to look at that blog, it is interesting, but I am getting worn out from a lack of support (due to very biased opinions).
    Don Levit

  5. John Goodman says:

    Don, thankfully you are back at a blog where we see reality as it really is.

  6. John Goodman says:

    I am reminded that Linda Gorman was way ahead of the WSJ on how taxes on the rich affect small business. See her earlier post here:

  7. Don Levit says:

    Here is a quote from the latest post to the angry bear blog about rescinding the tax cuts:
    The tax cuts for those making above 250K is a budget buster. Since the Federal Government is spending the Social Security withholdings as if they were a Republican wet dream of progressive “tax receipts.” The tax cuts for those making above 250K are coming right out of the Social Security withholdings of the bottom 98%. The cap on withholdings makes the crime even larger.
    FU Pete Peterson.
    Don Levit

  8. John Goodman says:

    Angry bear folks seem like such lovely people.

  9. steve says:

    Sigh, this is nonsense and you should know it. Using net income is not the correct metric. If one small business earned $100 billion dollars, it would skew everything.


  10. Neil H. says:

    Steve, why would that skew everything? The point is that you and the Obama administration (for reasons not understandable to me) are completely focused on people, and not on the function that capital serves.

    This is why we really need a consumption tax. You would not be able to claim that untaxed dividends and capital gains were benefiting the rich, because as long as those funds were reinvested they would be creating jobs, raising productivity and benefiting everybody else.

    Only if the recipient took the money and consumed with it, would there be a tax. In such a world, only the money that really benefited the rich (instead of passing thru their hands) would be taxed.

  11. steve says:

    Neil- I just object to twisting the data. 48% of the money going to the listed entities does not tell us what percentage of the population that affects. As to a consumption tax, I am all for it. Dump the corporate income tax also. Capital? If we had seen better real investments during the last 30 years we could talk about that.


  12. Linda Gorman says:

    In 2007 there were more than 4 million returns filed with adjusted gross income over $200,000.

    And why should the number of people affected matter? Are you saying that it is ok to confiscate the earnings of the 18+ thousand individuals who reported earning $10,000,000 or more (possibly because they sold a business they’d been building for decades) just because there aren’t very many of them?