In response to the proposed “Buffett rule,” which would guarantee that no millionaire pays a lower tax rate than middle-class families, conservatives in Congress love to claim that raising taxes on the rich would ruin small businesses. They are wrong. Small-business owners overwhelmingly are not millionaires, and the vast majority of millionaires do not make their millions from small business. Implementing the Buffett rule would have almost no effect on small businesses because such a tiny fraction of small-business owners are millionaires.
A report by the Office of Tax Analysis at the U.S. Treasury reveals just how little overlap exists between millionaires and small-business owners. The authors look at flow-through income reported on an array of tax forms including Schedule C, E-rental, F, and Partnership/S Corp income as reported on Schedule E, Part II. The report defines a “small business” as a flow-through entity that engages in business activity and has income over $10,000 but less than $10 million. A small business is then considered an employer if it has at least $10,000 in labor deductions.
Using this methodology, they determine that there were 3.8 million small-business employers in the United States in 2007.Here are three key findings from the report:
- Millionaires own only 3.3 percent of small businesses. Of the 3,808,000 returns with small-business employer income, only 126,000 were filed by employers with an adjusted gross income of more than $1 million. Adjusted gross income is a taxpayer’s yearly gross income minus certain adjustments provided for in the tax code, such as contributions to deductible retirement accounts or alimony paid by the taxpayer. The vast majority (76 percent) of small businesses are owned by individuals who make under $200,000 a year, and most of the rest (21 percent) are owned by individuals who earn between $200,000 and $1 million. For the most part, small-business owners are not millionaires. Most of them aren’t even close. (See Figure 1)
- Millionaires take home only 19 percent of small-business employer income. Small-business owners made $183 billion in 2007. Most of this income was earned by employers who made less than $1 million that year. In fact, the majority was earned by employers who make less than half that; 60 percent of small-business employer income went to individuals who earned less than $500,000. About a quarter was earned by employers making less than $200,000 a year. Most of the income earned through small businesses does not go to millionaires. It goes to businessmen and businesswomen who make much less. (See Figure 2)
- Only 2.5 percent of millionaires’ income is from small business. The Office of Tax Analysis report finds that millionaires earned only $35 billion through small businesses in 2007 while the U.S. Internal Revenue Service’s Sources of Income statistics show that millionaires in the United States earned a total of $1.4 trillion that year. This means that only 2.5 percent of all millionaires’ income comes from small business. By and large, millionaires are not small business owners. (See Figure 3)
Conservatives would have Americans believe that asking millionaires to pay their fair share in taxes would force all small businesses out of business. Yet the notion that either most small-business owners are millionaires or that most millionaires own small businesses is not borne out by the facts. The truth is that only a tiny percentage of small-business owners would be affected by changing the tax rate on millionaires.
When one in four millionaires pays a lower tax rate than 10 million middle-income Americans, there is a clear unfairness in our tax system. Implementing the Buffett rule would remedy this injustice while having no effect on the vast majority of small businesses. Don’t let conservatives get away with peddling false facts that help protect their most important constituency—millionaires.
Sarah Ayres is a Research Associate with the Economic Policy team at the Center for American Progress. Her work focuses on tax and budget policy.
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