11 December, 2011

The Nonexistent Millionaires

The GOP opposes Obama's jobs bill because they believe a provision to tax the wealthy, dubbed the 'Millionaire Surtax', takes money from small businesses and thereby prevents them from hiring more people and creating more jobs.
''Over half of the people who would be taxed under this plan are, in fact, small business people,'' Mr Boehner said. ''And, as a result, you're going to basically increase taxes on the very people that we're hoping will … create jobs. That's the real crux of the problem.'' [1]
Boehner's argument's strongest claim is that because of the way small businesses file taxes (most as entities whose income 'flows through' to the personal tax returns of the owners), these businesses will be subject to the surtax as their business income will appear on their personal income statements. This has important implications, as everyone agrees small businesses are the drivers of the US economy. The US Small Business Association indicates that:
"Small firms:
    -Represent 99.7 percent of all employer firms.
    -Employ about half of all private sector employees.
    -Pay 43 percent of total U.S. private payroll.
    -Have generated 65 percent of net new jobs over the past 17 years..." [2]
With this information, the a tax that would affect small businesses could indeed have repercussions on the economy. That is, however, only if the tax actually affects small businesses, defined by the Small Business Association as those with 500 or fewer employees. If defined by revenue level, they operate with average annual receipts of $7 million or less, with some industry exceptions. [3]

Let's consider a sole proprietorship or a wholly owned S-Corporation (a small business that has only one owner).  To be a small business, and thus, be included in the 99.7% of all employer firms that have generated 65% of net new jobs in the recent past, it would need to have gross receipts of no more than $7 million in normal circumstances.  These are the largest of small businesses; most fall somewhere far short of $7 million. For any business to be affected by the 'Millionaire Surtax', it would need to have $1 million in net profits flow through to the income of the owner.  Therefore, the largest of small businesses at $7 million would need to both be wholly owned by one person, and then also have a net profit margin of at least 15% in this economy.   With decreasing size and increasing number of owners, the profit margin would have to be even greater.

Furthermore, exceeding $1 million by $1 does not throw the businesses entire net profit into the new category.  The way progressive taxes in the US work is that amount in excess of the income threshold is the amount that is exposed to the higher rate.  For example, for a small business that manages to provide $1.1 million to its sole shareholder, the 2% tax would only be applied to the additional $100,000 in excess of $1 million, and this mythical individual would have to pay an additional $2,000, a rather small amount for a business owner who just made $1.1 million.

It is no wonder NPR could not find a single millionaire small business owner who opposed the tax:  they almost don't exist (or are at least exceedingly scarce). [4]  The fact is most small businesses are smaller than $7 million, have lower profit margins than assumed above, and in the case of partnerships and S-Corporations, have more than one owner across which those earnings would be split. Each of these factors makes it that much less likely they are passing through a million dollars to (each of) their owners, and much less likely they will be subject to the tax on the wealthy.

So if your millionaire small business owners don't actually exist, or are at least extremely small in population, who is it, Boehner, you are trying to protect?


[1]  Mann, Simon. "Boehner slams Obama over jobs bill". Sydney Morning Herald. November 8, 2011; accessed December 11, 2011.
[2]   SBA: Office of Advocacy.  "Frequently Asked Question [PDF]". Small Business Association. January 2011; accessed December 11, 2011.
[3]   SBA. "Summary of Size Standards by Industry". Small Business Association. Accessed December 11, 2011.  
[4]   Keith, Tamara.  "GOP Objects To 'Millionaires Surtax'; Millionaires We Found? Not So Much". December 9, 2011; accessed December 11, 2011.