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The Facts on Tax Cuts

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Today the President called on Congress to extend the middle class tax cuts for the 98 percent of Americans making less than $250,000 for another year. In fact, the President's proposal extends tax cuts for 97 percent of all small business owners in America. If Congress fails to act, a typical middle-class family of four will see its taxes go up by $2,200, and America's small business owners would take a big hit. The President refuses to let that happen.

This should be one of those rare moments where everyone in Washington can agree. Independent experts, economists, and folks on both side of the aisle agree that we should extend tax cuts for middle class families. But so far, Congress hasn't been able to extend middle class tax cuts because Republicans in Washington refuse to ask the wealthy and big corporations to pay their fair share. In fact, on every issue - from reducing the deficit in a balanced way to paying for investments in education - Republican insistence on cutting taxes for millionaires and billionaires has been the major cause of gridlock in Washington.

So, we look forward to a debate on tax cuts for the wealthy, but right now Congress should act to give middle class families the certainty and security of knowing their taxes won't go up in six months.

As the President said, if Congress passes a bill extending the tax cuts for the middle class, he'll sign it tomorrow. It's time for Congress to get to work.

Unfortunately, Republicans continue to push their tired, false claims to distort and distract the American people. We've already heard some folks opposing this proposal -- claiming we're trying to tax "job creators." The fact is, the people who create most new jobs in America are America's small business owners. The President has cut taxes for small business owners 18 times. Even using an overly broad definition of who is a small business owner (a definition that includes passive investors and highly compensated lawyers and hedge fund managers), today's proposal will extend all of the 2001 and 2003 tax cuts for 97 percent of all small business owners.

If Republicans in Congress want to act to help small businesses across the country, they should vote for the proposals the President proposed that the Senate is considering this week that include new incentives to help our nation's small businesses grow and hire and strengthen our economy.

Countering Claims That The President's Tax Proposals Would Hit Small Business

  • First, even under the GOP's own flawed definition of small business, approximately 97% of taxpayers with small business income would be completely unaffected by the President's plan: According to estimates by Tax Policy Center, about 97% of taxpayers reporting business income would not be impacted by the President's tax proposals -- which only affect those earning over $250,000. This has been confirmed by the independent Congressional Research Service, which concluded that "only a small fraction of businesses will be affected [by allowing the temporary income tax cuts to expire for people earning over $250,000 a year], around 2% to 3%."
  • Second, what Congressional Republicans Define as "Small Businesses" Include Millionaires and Billionaires, Law Partners, Hedge Fund Managers, and Passive Investors. Congressional Republicans define as small businesses any individual who receives "small business income". Under this definition:
    • Over half of the 400 Highest Earners in the United States Would Be "Small Businesses": According to IRS data, in 2009, among the 400 taxpayers with the highest adjusted gross income - group that averages over $200 million each in taxable income - at least 237 would have qualified as "small businesses" under this definition.
    • Hedge Fund Managers and Law Firm Partners are "Small Businesses": It counts any type of partnership income, proprietor income, or S corporation income as "small business" income. That includes:
      • income received by partners in law firms - each and every one of whom would be considered a "small business" under this definition
      • income received by partners in hedge funds - each and every one of whom would be considered a "small business" under this definition
      • passive income on investments
      • income from renting out a property like a vacation home.
    • This is why, last time Republican Congressional Leaders tried this argument they couldn't produce one so called "small business job creator." Last fall, when the GOP was blocking measures of the American Jobs Act that could have supported over a million additional jobs; they argued that asking millionaires and billionaires to pay their fair share would hurt "small business job creators." But after pressed by independent media outlets such as National Public Radio, Republicans in Congress and their wealthy allies could not produce a single millionaire job creator for NPR to interview. [LINK]
  • Third, in contras to the President's small business proposals, which would encourage and directly reward new hiring and investment, the GOP's so called "small business" tax proposal could actually discouragefirms from creating jobs or making new investments this year, while giving away tens of billions of dollars to millionaires and billionaires. The legislation sponsored by Majority Leader Cantor and passed by the House of Representatives provides across-the-board tax cuts (a 20 percent deduction) on qualified "small business" income for firms with fewer than 500 workers - including well-compensated hedge fund managers and law firm partners, andeven to companies that are actively laying off workers or cutting wages.
    • In some cases this proposal actually encourages postponing new hires and investments. Because new employees and expenses are deducted from this year's taxable income, for some companies the decision to expand payrolls and invest in their businesses can actually translate into their receiving a smaller tax benefit under the Republican's proposal.
    • In addition, the benefits are dramatically skewed - half of the $46 billion cost goes to those making more than $1 million, translating into an average tax cut of $45,000 for those millionaires.
    • The biggest beneficiaries from are not small businesses making investments and creating jobs, but rather the very wealthiest Americans - like law partners and investment managers, the so called "small business job creators" Republicans in Congress claim would be hurt by the President's position.
  • President Obama, building on a record of the 18 small business tax cuts he already has signed into law, has a plan to help 2 million actual small businesses hire workers and make new investments. The President has called on Congress to pass legislation that gives a 10 percent income tax credit for firms that create new jobs or increase wages in 2012 and that extends 100 percent expensing in 2012 for all businesses.
    • Encourage an additional $200 billion to $300 billion in new wages and jobs this year with a Small Business Jobs and Wages Tax Credit:
      • Credit for New Wages: The plan would provide firms with a 10 percent income tax credit for new wages added in 2012. This would encourage both new hiring and providing raises to existing workers. The credit would be limited to $500,000 per firm in order to focus the benefit on actual small businesses.
      • Focused on Middle Class Workers: Because the credit is based on the Social Security wage base, companies would receive no credit for increasing wages above $110,100. Unlike the House Republican proposal, the President's proposal ensures that companies that offer raises only to already well-paid executives would be ineligible for the tax relief.
      • Directly tied to new hires and pay increases: Because the credit is tied to increases in payroll, the benefit is only available only to companies that make new hires or offer employee pay-raises - directly encouraging growth and jumpstarting hiring. This stands in contrast to proposals put forward by Congressional Republicans that would cut taxes of hedge fund managers, law partners and many of the wealthiest Americans regardless of whether they employed or hired a single worker.
      • Helps 2 million Small Businesses: This credit would help nearly 2 million actual small businesses with employees.
      • More than $20 billion in tax relief to encourage an additional $200 to $300 million in new wages and jobs: The President's plan will provide more than $20 billion in direct tax relief targeted to small businesses in 2012 and 2013, according to a score from the independent, non-partisan Joint Committee on Taxation. This $20 billion in direct tax relief could encourage an additional $200 billion to $300 billion in new wages and jobs this year.
  • Support business investment this year with 100 percent expensing for 2012: The President is proposing an extension of the 100 percent expensing provision that he signed into law in December 2010, which rewards firms for making investments by allowing them to deduct the full value of those investments through 2012. Extending 100 percent expensing for an additional year would put an additional $50 billion in the hands of businesses in 2012 and 2013. Most of this relief would be recouped by the Treasury as businesses regain their strength.
    • What Others Have Said About Expensing:
      • The National Federation of Independent Business called expensing a "big victory" for small business: "Bottom line - just about every small business can write-off the full amount of investments they want to make in 2010 and 2011." (December 2010).

In a 2010 letter signed by the U.S. Chamber of Commerce, more than 80 business groups - representing industries from aerospace and wireless to builders, contractors, and retail stores - wrote that "bringing back bonus depreciation will encourage companies of all sizes to invest in newer, more efficient, and more environmentally-friendly equipment, which will help large and small businesses alike."

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Amy Brundage is the Deputy Press Secretary for the Economy. This post originally appeared at the White House blog.