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If tax breaks for the wealthy expire, would small business suffer?

Republicans say an extension would encourage spending and job creation. Most Democrats say the majority of small firms wouldn't be affected anyway.

November 22, 2010|By Jim Puzzanghera, Los Angeles Times

"Its disingenuous for people to say this is going to have such a horrible affect on small business if they let these expire," Poore said. "Either they're honestly ignorant of how this really works or they're being intellectually dishonest."

The nonpartisan Congressional Budget Office said in a report in February that extending the tax cuts would not do much to create jobs.

Although an extension would help a company's bottom line, "increasing the after-tax income of businesses typically does not create much incentive for them to hire more workers," the CBO said. Demand is the principal driver of those decisions, it said.

Democrats and Republicans base their arguments on data from Congress' Joint Committee on Taxation.

This summer, the committee estimated that 3% of taxpayers who had net business income — about 750,000 filers — would be affected if the current top-level rates increase. And those filers account for half of the approximately $1 trillion in net business income reported on all individual returns.

Tax experts said there's no way to know whose income that is because the data can't be tied to specific companies.

"We don't know if this is the owner of a small tool-and-die plant or a McDonald's franchise or a partner in KPMG," said Scott Hodge, president of the nonpartisan Tax Foundation.

"The Republicans have been a little fast and loose in trying to define all of these taxpayers as small-business owners," he said. "The lack of data has created this political debate, which gives a lot of leeway on both sides to kind of stretch their arguments."

The Tax Foundation's own analysis found that if the top-level tax cuts expire, just 39% of the additional money raised by the government would come from business income.

Hodge also criticizes Democrats' argument that an increase in the top tax rates would cause little harm to small businesses because only about 3% of them would face the increase.

"Statistically speaking, only about a half a percent of all Americans will be diagnosed with cancer in any given year, and we take that pretty seriously," Hodge said. "So to try to minimize the economic impact by saying only 2 to 3% of taxpayers will be affected is, to some degree, economic malpractice."

jim.puzzanghera@latimes.com

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