The deadline’s looming and this is what we get from Senator Dean Heller (R-NV): “Instead of compromising, the Democrats want to raise taxes on small business at a time when we need jobs,” Nevada Sen. Dean Heller said of the Democrats’ plan last month, calling their insistence on their bill “further proof that Washington is broken.” [LVSun](emphasis added) Note the “small business” insertion. It’s required in all GOP utterances about taxation.
What’s on the table? “Take the student loans debate. In the past month, Senate Democrats lost a vote on their bill to offset the $6 billion cost of keeping student loan interest rates at 3.4 percent by closing a tax loophole on hedge funds. Senate Republicans lost a vote on their bill to offset it by stripping money from a health care prevention fund.” [LVSun] (emphasis added)
Now, go back and substitute “hedge funds” for “small business” and you will have the drift of the Republican argument. It is better to allow student loans rates to double to 6.8% than it is to close a tax loophole on hedge funds.
This raises some questions about the core message of the Republicans, Senator Heller included.
#1. What is a Small Business? “… what Congressional Republicans Define as “Small Businesses” are Predominately Millionaires and Billionaires, Corporate Law Partners, Hedge Fund Managers. Congressional Republicans define as small businesses any individual who receives “small business income”.” [Wh] OK, so what is “Small Business Income?
Back in August 2011 the OTA attempted to define what constitutes a small business for tax purposes (pdf). The OTA suggests that previous definitions are overly generous:
“Although “small business owners” are often the subject of tax policy debate, a consensus does not exist regarding the specific attributes that distinguish small businesses from other firms. Previously, the Office of Tax Analysis had counted a small business owner as any individual who receives flow-through income from a sole proprietorship, partnership, S corporation, farming operation or miscellaneous rental activity. This overly broad definition was used because, for the majority of flow-through business income (partnerships and S corporations), it was not possible to trace income from the business entity to the respective owner(s). Due to newly accessible tax data, this technical constraint has been overcome.” [OTA pdf] (emphasis added)
Notice that the old definition classified a small business person as ANYONE receiving flow through income from just about anywhere. Major money makers took full advantage of this rather loose categorization.
Over half of the 400 Highest Earners in the United States Would Be “Small Businesses”: According to IRS data, in 2009, among the 400 taxpayers with the highest adjusted gross income – group that averages over $200 million each in taxable income – at least 237 would have qualified as “small businesses” under this definition. [Wh]
How nice for them, because these “small business persons” are NOT necessarily the butcher, the baker, the candlestick maker, the auto parts dealer, the retail grocery owner, the furniture store owner, the beauty shop proprietor, the catering service, the garage owner, or the corner bodega shop keeper.
If we count absolutely ANYONE who gets income from S corporations, proprietorships, and partnerships, then each and every member of a law firm’s partnership is categorized as a small business person, including the lobby shops in Washington, D.C. Each and every partner in a hedge fund is categorized as a small business person. Each and every individual getting passive investment income is a small business person.
The definition of a small business is problematic, but even suggestions that accounting treatments be changed brings howls of “tax increases” to “job creators” from the Republican side of the aisle. During the last big debate on student loan rate reductions:
“…the Republicans would not accept the Senate Democrats’ proposal to pay for a one-year extension by changing a law that allows some wealthy taxpayers to avoid paying Social Security and Medicare taxes by classifying their pay as dividends, not cash income.” [NYT]
This is nice work if you can get it. You are a “small business” if ANY of your income passes through from passive investments, hedge funds, law firms, and lobby shops. AND for the wealthiest among us you get to avoid paying payroll taxes by classifying earnings as dividends and not cash income.
#2. Exactly what “small businesses” would have be affected by S. 2343? Here’s the loophole the Democratic leadership was trying to close:
Amends the Internal Revenue Code and title II (Old Age, Survivors and Disability Insurance) of the Social Security Act to require certain shareholders of a subchapter S corporation engaged as a partner in a professional service business to include income or loss attributable to such business in their net earnings from self-employment for employment tax purposes.
Restricts such tax treatment to shareholders whose modified adjusted gross income exceeds a specified amount that varies based on their tax filing status.
Defines a “professional service business” as any trade or business providing services in the fields of health, law, lobbying, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, investment advice or management, or brokerage services. [Thomas]
The loophole would be closed for anyone earning over at least $250,000 AGI from a proprietorship, S corporation, or partnership. [Thomas]
To get an idea of just how few people would be discomfited by this change in accounting treatment, note that the average annual earnings for a medical practice is about $158,000. Average mean annual earnings range from about $154,000 to $199,860. [BLS]
The Bureau of Labor Statistics reports that the average earnings for members of the legal profession range from $75,350 annually for lawyers working with insurance carriers to $199,850 for lawyers in the energy sector. Architects and engineers may expect to see a range of annual earnings from about $73,000 annually up to approximately $105,000. [BLS] Salaries for accountants range from $40,000 to about $110,000 annually. [BLS] For all the brouhaha about over-paid athletes, most professionals can expect to earn about $79,830 annually. [BLS] The annual mean earnings for farm and ranch operations comes in at approximately $70,000 [BLS]
So, what small businesses are Senator Heller and his Republican cohorts so diligently protecting? The average sports agent is taking in about $92,500. The average personal financial adviser earns $90,900. The average chief executive officer earns about $176,550. [BLS] The majority of those people engaged in the specific occupational fields set forth in the terms of S. 2343 would not be affected at all by the changing accounting treatment.
When it all boils out, what’s left is the notion that the top 0.5% must be assuaged, even if the sons and daughters of most health care professionals, most lawyers, most architects, engineers, and accountants, most sports agents, and most management consultants pay double the current rate on their Stafford Student loans.
Thus, to the farmer, the rancher, the architect, the lawyer, the physician, the accountant, the agent, the engineer, the broker, the financial adviser, and the management consultant…. and to the artist, baker, clothing shop owner, computer specialist, landscape company proprietor, right on to the veterinarian and the zoologist…. Senator Heller’s message is clear.
It is more important that the ultra-rich be protected than it is for your son or daughter to find an affordable student loan.
Oh, wait, the Republican did offer another solution — just drop the preventative health care funding from the Affordable Care Act. Stripping funding for cancer screenings, anti-obesity programs, and health care awareness for youngsters didn’t seem very popular, so now the GOP has come back with “tweaks” to the FY 13 budget for offsets. These would include requiring federal employees to contribute 1.2% more to their own retirement funds, a revision of Medicaid taxes, auditing Social Security overpayments, and changing the timeline for the accrual of student loan interest. The Republican wrote to the President, Senator Tom Harkin (D-IA) responded: “…if Republicans were really serious about negotiating a plan to pay for the bill, they would be meeting with Democrats on the Hill, not writing letters to the president.” [USN] Harkin also added that there was no way the Tweaks added up to a real solution.
And, what’s really interesting — is that in the past there was Republican support for closing the very loophole the Democrats are now suggesting. [USN] How do we spell O b s t r u c t i o n i s m?
“You may never know what results come of your action, but if you do nothing there will be no result.” Gandhi.