In the recent presidential debate, President Obama said that only 3 percent of small businesses would pay higher rates under his plan to increase the top two marginal tax rates. The implication was that job creation wouldn’t suffer, because so few businesses would pay higher tax rates under his plan.
Bloomberg, in an editorial after the debate, repeated this misleading statistic.
This line of reasoning is a red herring, because the number of small businesses paying the higher rates is irrelevant when it comes to job creation. That’s because most small businesses don’t hire workers.
Most businesses that are classified as small businesses represent the part-time efforts of their owners or are businesses that don’t hire workers. They can range from side jobs such as a person selling items on eBay out of his basement to academics conducting studies or giving lectures to doctors and lawyers practicing their professions on their own.
The Treasury Department, in a study linked to by Bloomberg, reports that there are 34.8 million businesses that it describes as small businesses. Of those, only 4.3 million are employers. More than 30 million, or 88 percent of small businesses, do not hire workers. These non-employers fit the description above.
When it comes to how higher taxes on small businesses would impact jobs, it is much more instructive to look at the size of the employer-businesses that would face higher tax rates under Obama’s plan.
The Treasury study reports that 1.2 million of those 4.3 million small businesses that employ workers would face higher rates under Obama’s tax increase. Those 1.2 million businesses earn 91 percent of all the income earned by the small businesses that employ workers. (continues below chart)
These businesses that earn almost all of the income are the most successful flow-through employer-businesses. That also means they are the businesses that create the most jobs.
In fact, a recent report by the accounting firm Ernst and Young found that Obama’s plan would destroy more than 700,000 jobs, because the higher rates he calls for would fall on these biggest, most successful small-business employers that employ 54 percent of the private workforce.
Higher rates on these large job creators would slow job creation, because they would rob these businesses of resources they could invest back into their businesses to expand their operations and hire new workers, and they would reduce their incentives to take on more risk through new investment.
At a time when the unemployment rate lingers near 8 percent, the economy cannot afford to destroy more than 700,000 jobs because of a misguided tax increase. That’s the stat that matters.