Main Street vs. Easy Street: Busting Bush Tax Cut Myths

Call it a sign of the times, but small businesses have once again become the center of a self-serving debate on Capitol Hill. Every time President Obama proposes eliminating President Bush's 2003 tax cuts for households earning $250,000 or more a year, opponents try to shift the debate from Easy Street to Main Street.

But the debate is spurious and ultimately more harmful to small companies. That's because it's overshadowing what should be the real debate -- about tax policies that really do stifle small business job creation. They have nothing to do with the Bush tax cuts.

Nonetheless, tax cut proponents continue to repeat the argument. The sentiments of Sen. Orrin Hatch, R-Utah, are typical. He recently asserted that allowing the tax cuts to lapse for the wealthy would amount to "a job-killing tax hike on small business during tough economic times." The view is manifest among Republicans and conservatives.

Rep. Paul Ryan, R-Wisc., the architect of the House Republican budget plan, enacted 235 to 189 last week, also believes Main Street and Easy Street are interchangeable. He cited the plight of small businesses when constituents at a recent town meeting called him out for proposing sharp cuts to Medicare while defending tax cuts to the richest 2 percent of the nation that will ultimately cost the government $1 trillion.

It's not like he has no grounds for doing so. The National Federation of Independent Business (NFIB) is a leading proponent for extending the Bush tax cuts to the wealthy. But the NFIB is nothing if not ideologically driven. It's never seen a tax cut it didn't like.

The question is obviously important because small businesses make up such a large percentage of the economy and traditionally drive job growth coming out of recessions. So anything that hurts small business will invariably impact the recovery. But does allowing the Bush tax cuts to expire on high-income households really hurt Main Street?

A number of reports have already disputed that claim. In one of the most definitive, the Tax Policy Center, an adjunct of the Urban Institute and the Brookings Institution, studied federal tax returns. It found that less than 2 percent of upper-bracket returns -- individuals earning $170,000 and households $210,000 or above -- were filed by small business owners.

Not surprisingly, conservative groups like the NFIB claim the Tax Policy Center is biased because of its affiliation with a liberal think tank. The NFIB says it conducted its own research among its members and claimed that the percentage was far higher.

"What [the Center] did was look at IRS data. What we did at the NFIB is we went out and we asked small business owners," said the NFIB's Bill Rys. "We talked directly to the source. We found that the overall number was higher ... And some research we did at the NFIB found that businesses between 20 and 250 employees are the ones most likely to be hit with that tax increase."

Forget for the moment that the Tax Policy Center's study is based on a statistical analysis of tax data, while the NFIB's survey is anecdotal, with no claim to scientific accuracy. The argument goes that most small businesses operate as sole proprietorships or LLCs, and, as such, their business income is treated like personal income. Right now the top bracket is 35 percent. President Obama would raise that to 39.6 percent, the rate in effect under President Clinton.

One of the small business poster boys for the Bush tax cuts is Sam Misleh, who owns four restaurants in Virginia, one of which he opened six months ago. In a good year, he told Fox Business News, he earns just over $250,000 and files his returns jointly with his wife. His main complaint? He doesn't feel like he's a millionaire or billionaire.

"It's so hard to get a loan from a bank nowadays, you have to almost fund everything yourself," said Misleh. "That's the biggest problem. The biggest hurdle is trying to get money to open and operate an establishment."

The upshot is that if the Bush tax cuts remain in place, his income will be higher and he'll have more money to invest. But personal income is one thing; business income and investment is another. Misleh already pays no taxes on the money he invests in, or spends on, his businesses.

That includes payroll, office supplies, rent, utilities, health insurance for his employees, travel, entertainment, investment in equipment, and pretty much any other business expense. The money left after expenses would constitute profit and would be taxed at the personal income rate. Therefore, Obama's tax cut repeal may crimp his lifestyle a bit, but not necessarily his business operations. If Misleh wants to avoid the tax increase, he could simply take a little less money out of his business as personal income and spend it on growing his business instead.

But all of that is problematic. The real issue is the lost opportunity that comes when money is diverted to pay for the upper-bracket Bush cuts that could provide more benefit to the economy if spent elsewhere. A recent Congressional Budget Office study found that the Bush tax cut money could be better spent on aid to state and local governments, extended unemployment insurance benefits or tax credits that encourage job creation and capital spending. Dollar for dollar, each of these measures would have about three times the impact on GDP as continuing the Bush tax cuts, according to the Washington Post.

A separate survey by the National Small Business Association found that small businesses would most benefit by extending expanded section 179 expensing as well as a provision to allow self-employed individuals to deduct the full cost of health insurance from their self-employment tax, a break already enjoyed by large corporations. Right now the deduction, only available for the 2010 tax year, amounts to a 15.3 percent tax break on health insurance.

Those are the kinds of tax issues that should be the focus of debate. Trying to frame the Bush tax cuts as a small business issue does a disservice to the nation's hard-working small business owners. It's time to put it to rest once and for all.