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Fact-checking the fact-checkers

September 28, 2010

An effort by "Factcheck.org" passed on by the TaxProf doesn't inspire confidence in their fact-checking prowess. This is part of their "fact check" on the Republican "pledge" election year platform:

Pledge, page 14: [Obama] also wants to raise taxes on roughly half of small business income in America.

Fact: This is an exaggeration. Republicans are equating "net positive business income" reported on individual returns with "small business income," which isn’t correct. They rely on a report from the nonpartisan staff of the Joint Committee on Taxation (p. 12), which estimated that about 3% of taxpayers who have any business income on their personal returns would see a tax increase under Obama’s proposal, and that those 750,000 taxpayers account for about half of all the business income reported.

But some of that income is from big businesses raking in tens of millions of dollars a year. The JCT stated quite clearly that "These figures for net positive business income do not imply that all of the income is from entities that might be considered ’small.’" Some in fact are quite large, and those big businesses account for a good chunk of that income.

The JCT said: "For example, in 2005, 12,862 S corporations and 6,658 partnerships had receipts of more than $50 million."

Republicans do have a point here. Many small businesses and some large fraction of small-business income will be adversely impacted by raising the top rate on individual taxpayers.

The fact is, though, that the JCT couldn’t estimate how much of the total business income was accounted for by "small" businesses, or how many of the 750,000 individuals affected own "small" businesses. What we do know is that a good deal less than half the small business income, and something less than three percent of small business owners, would be subject to higher taxes.

When the "fact checkers" say that only 3% of "small businesses" will be affected, they include as a "small business" every Mary Kay seller, everybody who gets even a tiny K-1 from a publicly-traded partnership, every moonlighter with a schedule C -- in other words, a lot of people who aren't really in it for a living. But when their definition of "small business" includes successful people, suddenly that definition seems questionable.

The "fact checkers" also say "we do know" that "a good deal less than half the small business income" will be subject to the tax increase. If we "know" that, we should "know" pretty well what percentage will be hit by the expiration of the Bush-era tax cuts, but they don't offer it. "A good deal" is a mushy description. Here are some things "we do know":

- The center-left Tax Policy Center estimates that the tax increase will affect 44.3% of small business income. Is that "a good deal less than 50%"? It certainly is a good deal more than 3%.

- For taxpayers who get more than 50% of their income from their business, the Tax Policy Center estimates that 58.7% of their taxable income will be subject to the higher brackets.

When you look at the people who are serious about it -- the ones that get most of their livelihood from their business -- well over half of their income will be hit with higher taxes when the Bush-era tax cuts expire.

It hardly seems like a great "exaggeration," then, to say that "roughly half" of small business income will be affected. Not saying what percentage they think would be affected makes for a weak "fact check."