What’s
Wrong Today:
There is a chance
that in tonight’s debate, we
will get another dose of baffle ‘em
with BS by Mr. Romney concerning small business
taxes. Romney and Ryan continue to conflate
small business taxes with individual income taxes.
The GOP claims that a lower top personal income tax rate will
allow businesses to hire more people.
At the vice
presidential debate, Paul Ryan repeated a persistent conservative talking point
about the Obama administration’s plan to let Bush-era tax cuts expire for the
rich. He
said:
“Two-thirds of
our jobs come from small businesses…This one tax would actually tax about 53% of
small-business income.”
In the
first presidential debate, Mitt Romney struck
the same chord,
saying that Obama’s plan to make wealthy individuals pay Clinton-era taxes was
an attack on “the people who work
in small business.”
So,
What’s Wrong?
The
rhetorical appeal is clear: Americans love small businesses.
But, let’s leave the fact-free zone by
defining the universe of businesses: There are a little more than 6 million businesses in the US with
employees. They employ about 121 million people.
Businesses with less than 500 employees
represent 99.7% of all businesses in the US. In fact, only 981 companies have more than 10,000 employees each.
So how
small is a small business?
- Firms
with more than 100 employees
are only 2% of total businesses in the US
- That
means firms with less than 100 employees are 98% of all companies
- The
average firm with less than 100
employees grosses $7.1million in sales
- As
of 2008, there were 4.1 million firms
with 9 employees or less, they employed an average of 3.2 people.
|
Firm Size |
# of Firms |
# Employees |
Avg. # Employees |
Total Sales |
Avg. Sales/Co. |
|
1-4 |
1,070M |
6,000M |
1.95 |
$1,435B |
$464,000 |
5-9 Employees |
1,060M |
7,000M |
6.60 |
$1,145B |
$1,040,900 |
When a politician
describes a “little 250 employee firm”, these are among the largest
employers in the US. So, let’s call a less-than-100 employee firm small. Remember, the average >100 employee firm grosses $7.1million in
sales annually.
When Republicans talk
about lowering the highest tax rate on small businesses, they are referring to individual
income taxes. The reasoning is these
same wealthy
individuals are small business owners, some in the form of sole
proprietorships and pass through tax structure business entities (see below).
Question 1 to ask Mr.
Romney: What size firms are you proposing for tax cuts?
Question 2: What type
of firm are you proposing for tax cuts?
Back into the fact zone:
There are four common types of business entities in the US. They are: Corporations,
partnerships, S-corporations and sole proprietorships.
Partnerships are primarily two types, a
limited liability partnership (LLP) or a limited liability company (LLC). There
are also other types of businesses, such as Registered Investment Companies
(RIC’s), which are glorified investment vehicles with capital gains tax pass
through. S-corporations also allow pass through taxes, although not as lenient
as partnerships.
According to the tax
code, some “S” Corps, Partnerships and Proprietorships have the ability to pass
through business income to the individual owner’s income taxes.
Corporations cannot
pass through business profits. They are taxed via the corporate tax code. The US
Bureau of the Census, from where we get the above data, uses business type definitions based on the tax code:
- Corporation – An incorporated business that
is granted a charter recognizing it as a separate legal entity having its
own privileges, and liabilities distinct from those of its members. - S-Corporation – A form of Corporation where the
entity does not pay any federal income taxes. The corporation’s income or
losses are divided among and passed to its shareholders. The shareholders
must then report the income or loss on their own individual income tax
returns. - Partnership – An unincorporated business
where two or more persons join to carry on a trade or business with each person
having a shared financial interest in the business. - Sole Proprietorships – An unincorporated business with
a sole owner.
Below is a chart of
number of these firms by type, who had at least one paid employee during part
of 2009:
|
Corporations |
“S” Corporations |
Partnerships |
Sole |
|
2.3 |
2.6 |
600,000 |
1 |
Sole
Proprietorships
Republicans claim sole proprietorships create jobs. The Census statistics on
business latest data are from
2009. These numbers require a business had at least one paid employee
during a part of the year. These sole proprietorships represent
16.4% of all businesses with employees in this country.
Statistics also show the self-employed are not paying large amounts
of tax. From the SBA we see their
median tax rate is only 10%. In 2008, 15.5 million individuals listed their
primary occupation as self-employment (both incorporated and unincorporated).
Only 4.1% of the self-employed (about
192 thousand people) were in the highest marginal tax bracket of 33% or more.
In 2009, about 947
thousand sole proprietorships employed 4.8 million people. 753 thousand (79.5%)
of these sole proprietorships employed zero
to four employees for the year, or 1.2 million people, with an average of 1.63 persons employed.
In other words, 79.5% of these sole
proprietorships are not really generating
jobs.
And given their average tax rate, most people who are self-employed (96%)
are close to being broke. They aren’t
earning enough for themselves, never mind being able to generate jobs.
Firms
with zero employees
It may
surprise you to learn that there are ANOTHER 22.1 million firms (3.7 times the
number WITH employees) that have no payrolls. BTW, they average $45.7million in annual revenues-don’t you
wonder what can bring in all that dough without any workers? (Hint: capital) The Census also gives us statistics on these businesses.
According to the
Census, the majority of all business establishments in the United States are
non-employers.
So, Question 3: Will firms without employees receive tax breaks?
“S”
Corporations
In the above table, S Corporations have the most employees.
Why? Because they are tax pass through vehicles. S Corporations
allow owners to not pay as much in
payroll taxes. They have to pay employees a reasonable salary in
an S Corp, yet income from the business is passed through and taxed as
individual income. That income isn’t subject to FICA, or social
security and Medicare taxes, unlike sole proprietorships because they
pay self-employment tax.
Practically any individual earning
freelance or self-employment income can incorporate as an S corp.
Many large corporations also shelter their
profits in “S” Corps. In 2007, for example, 339 manufacturing corporations
that averaged $429 million in revenue
filed as “S” corps and
paid zero corporate taxes.
By contrast, the 4,375 manufacturers that
filed under the corporations tax code made a just over 10% of that amount and
paid an average of about $1 million in corporate taxes.
So, are “S” Corporations
are really creating jobs? It is unclear. Many of these employees are also
owners of the business, playing games with the tax code and classifying
themselves as employees with low salaries in order to reduce their overall tax
bill.
Question
4: Will “S” Corporations receive tax breaks?
In
Conclusion:
The point of this
exercise is to show that Republicans are arm waving about taxes, in other
words trying to baffle us with bullshit:
Business taxes are not individual taxes and for those businesses with tax pass
throughs, most owners are sole proprietors and are barely getting by. In the case
of “S” Corps, owners are hiring themselves….to not pay taxes.
It’s clear that claims about reducing the top individual
income tax bracket have little to do with actual jobs. The statistics
from the Bush tax cuts also show that lower taxes for the rich do not generate jobs.
If politicians really
want to change the tax code to generate jobs, they would be creating a tax rebate tied to hiring and retention of out-of-work Americans, not simply giving more money to the wealthy.
