Three weeks ago Speaker of the House John Boehner cornered himself with his "Plan B" and a week later, canceled the vote on his own initiative. He did so for lack of sufficient votes for passage from his majority caucus. Cryin' John finally had something to cry about as he hoisted himself on his own petard while revealing to the nation that he's not very good at counting.
All of which came as no surprise to many of us in the small business community that have known for some time, that basic math was not Mr. Boehner's strong suit.
Earlier this month, the Washington Post's fact checkers evaluated the speaker's repeated claims about the allegedly devastating impact ending the Bush Tax Cuts would have on small businesses. Their verdict: "Three Pinnochios," just short of a whopper.
But that hasn't stopped Speaker Boehner and his allies from repeating the claim, and many in the media reporting as if it were fact.
So, I thought I'd take the opportunity for a quick lesson in remedial math on small business taxes. What follows are real questions, with "answers from the Speaker" followed by fact based explanations revealing Speaker Boehner's math challenged rhetoric for what it is -- nonsense.
Q: "Will raising the income threshold for tax rate increases from $250,000 to $1 million help most small business owners?"
BOEHNER: "One out of 33. That's pretty close to half, isn't it?"
The Treasury Department reports that fewer than 3 percent of tax returns listing any business income have taxable incomes over $250,000. That means about one out of 33. So, 32 out of 33 small businesses won't benefit from a new carve-out for income from $250,000 to $1 million. Meanwhile, moving to the $1 million threshold gives away hundreds of billions of dollars over 10 years -- almost half of the revenues gained from ending the extra Bush cuts above $250,000. We need those revenues to make investments in the middle class that get our economy back on track. Giving them away with a new carve-out is a bad deal for the overwhelming majority of small businesses.
Q: "Who is that one out of 33 anyway? Are they the real small business job creators?"
BOEHNER: "Would you count Donald Trump as a small business? I'm okay with it if you are."
Many of the individuals who report millions in "business income" on their personal tax returns are not what most people think of as small business owners. This includes:
• Partners in Washington's biggest lobbying firms -- like Patton Boggs ($40 million in lobbying income in 2009).
• Part owners of multi-million dollar S Corporations -- like Bechtel Corp, the biggest engineering firm in the country (gross revenue in 2008: $31.4 billion).
• Big real estate investors and celebrities -- Donald Trump? Kim Kardashian? Sheldon Adelson?
Q: "Do small business owners pay taxes on their gross revenues or net profits?"
BOEHNER: "Well, that's a lot like Obama's jump shot: it's swish, nothing but net."
Most small businesses are organized as pass-through entities. That means that the income from the business passes through to the owner's personal tax return. But it's not the total gross revenue of the business that passes through, it's the net profits... after subtracting all regular business expenses. A business with a very healthy 10 percent profit margin would have to gross $2.5 million before its owner would net $250,000 in profits passing through to her/his personal taxes.
Q: "If the tax rate goes up by 4.6 percent for incomes over $250,000, will the rare small business owner who makes, say, $300,000 pay $13,800 more in taxes?"
Because income tax rates are marginal, that rare business owner who does make more than $250,000 in taxable income won't pay the additional 4.6 percent on all of her or his income, only on the amount exceeding $250,000. For our $300,000 business owner, that means paying the additional 4.6 percent on $50,000 in income. So we're talking $2,300 more in taxes -- less than 1 percent of her $300,000 income.
Q: "How does raising the income tax rate prevent small business owners from reinvesting in their businesses and creating more jobs if they can make those investments with pre-tax dollars?"
BOEHNER: "Um, busted? Next topic. Hey, cliffs are really scary, aren't they?"
If you're reinvesting in your business -- whether that's buying new equipment or creating more jobs -- you're putting your operating income back to work in your business, not taking it out as profit (which is when you would pay income taxes on it). So, the marginal income tax rate doesn't matter one penny -- you're not paying income taxes on that reinvested operating income anyway. Customer demand is what drives small business job creation -- not the tax rate.
So there you have it, the biggest lie of 2012: Republicans are just trying to help the little guy. We could be ungenerous, even cynical and say the Republican leadership works for the 3 percent with the most to lose. The evidence is overwhelming that little if any negative impact will be felt by the remaining 97 percent if we raise the marginal tax rate on those earning over 250,000 a year. Those are real numbers and they add up.
We can avoid the fiscal cliff while restoring balance and reason to our budget policies and in so doing protect small business, Medicare, Medicaid and Social Security (and while we're at it the middle class). Or we could go where the evidence takes us- Republicans are lousy with numbers and following their lead takes us right back into recession.
Me, I'm sticking with the skinny guy with the good jump shot and a basic grasp of math- swish, nothin' but net.