Friday, August 29, 2008

Big Misconceptions About Small Business and Taxes

August 29, 2008
Center on Budget and Policy Priorities
By Chye-Ching Huang and James R. Horney


Supporters of various tax benefits for high-income households often claim that failure to maintain them would have an undue effect on many small businesses. But even assuming a broad definition of “small business,” these claims are very often exaggerated or false.

Only 1.9 percent of taxpayers with small-business income face either of the top two income tax rates. Thus, allowing the 2001 reductions in these rates to expire as scheduled in 2010 would not affect most small-business owners. Strengthening the Earned Income Tax Credit could help more than seven times as many small businesses as extending the reductions in the top rates.

Claims that the estate tax must be largely or entirely eliminated to protect small businesses are misleading as well. Only a very small number of small businesses (just 740 nationwide in 2008, according to the Tax Policy Center) owe any estate tax.

The typical small business is not a wealthy hedge fund. Closing a lucrative tax loophole used by hedge fund managers would have no effect on “mom and pop” businesses.

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