Paul Ryan's Newest Tax Policy Talking Point Trips Over Reality

Small-Business Owners Don't Like Ryan's Tax Math

WASHINGTON -- Joseph Rotella is president and owner of the Spencer Organ Co., a small business with 10 employees that specializes in rehabilitating pipe organs from churches and communities around the country. The operation does quite well, with roughly $2 million in revenue a year and enough profit to land Rotella squarely in the top tax bracket that benefits most from the Bush tax cuts.

That makes Rotella Exhibit A in a new effort from Rep. Paul Ryan, chairman of the House Budget Committee, to convince voters that in little more than a year, President Barack Obama will oversee a job-killing crush of tax hikes. Over the past week, the Wisconsin Republican has raised the frightening specter that under Obama's tax policies, small-business owners will soon be turning over half of their annual paycheck to the government.

"In 15 months' time, the top tax rate on small businesses goes to 44.8 percent. Now they are going to throw another tax increase on it," Ryan said during an appearance on NBC's "Meet the Press" this past Sunday. "We are going to be taxing small businesses at about 50 percent. According to the Treasury Department, 80 percent of businesses file as individuals. Sixty percent of [small] businesses in this country file their tax rates as individuals and will get hit by this new tax that goes to 50 percent in 15 months. Why would we do that?"

Broadly speaking, we wouldn't. And even if we did, it turns out that many small-business owners, including Rotella, say it wouldn't make a bit of difference in their hiring decisions.

"If we have work and things are rolling along, then we're rolling along," said Rotella. "I'm not basing business decisions on whether our tax rate shifts a little bit one way or another."

He added, "My big concern is actually infrastructure within my community, because if my employees are happy, if there's good schools, roads that work, public transportation and public services that are good, then my employees are happy and they're more productive. If public transportation gets cut, one of my employees may have a much more difficult time getting to work. That's really hard. We've invested all this time into this employee, and then they have to think about doing something else for a living."

Despite testimonials like these, Ryan's argument that 60 percent of small businesses will face a tax rate of 50 percent --
stated most recently in a CNBC interview on Wednesday morning -- seems poised to become the GOP's top talking point in the weeks, if not months, ahead, as lawmakers look to stigmatize the president's job creation proposals and grease the wheels for a further extension of the Bush tax cuts.

But the argument is largely misleading, according to both small-business owners and analysis from the nonpartisan Tax Policy Center.

Ryan's office told HuffPost that his claim about the 50 percent rate is based on an agglomeration of several tax policies affecting wealthy individuals. By adding up the effects of multiple perks that will expire with the Bush tax cuts, and then lumping in individual Medicare taxes, Ryan created a total top rate for high earners of 44.8 percent. This combination of several different taxes is not how individual income tax rates are usually stated. Ryan could just as easily add in the average sales tax that individuals pay and cite that higher figure as the total tax rate.

On "Meet the Press," the congressman nevertheless made another addition to his already arbitrary figure, tacking on the 5.6 percent surtax on millionaires that Democrats have proposed to pay for the president's job creation proposals. From there, he arrived at the menacing 50 percent figure.

From a narrow, technical perspective, Ryan's claim about the total tax rate is true. Congressional Democrats acknowledge that the millionaires tax -- if it ever passed -- would remain in place even if the Bush tax cuts expired and the rates on the wealthy, as a result, rose.

The more problematic portion of Ryan's claim is his argument that, because many small businesses file as individuals rather than as corporations, higher taxes for rich individuals can be considered higher taxes on small businesses. In fact, the overwhelming majority of small businesses do not earn anywhere near enough profit to land them in the brackets that currently benefit from the Bush tax cuts.

According to an analysis by the Tax Policy Center, just 2.2 percent of the 36 million taxpayers who report small-business income on their tax returns would land in the highest tax bracket if the Bush tax cuts were allowed to expire. And only 1 percent would make enough to be subject to the millionaires surtax.

But even within this tiny slice, many of the operations that would be subject to higher taxes are not the mom-and-pop stores that the public generally pictures when it hears "small business."

"These are not all people running what we think of as small businesses," said Roberton Williams, senior fellow at the Tax Policy Center. "They may be giving speeches, writing books, we don't know. This includes lots and lots of different kinds of people. This could be a hedge fund manager. This could be a law partnership. This could be a doctor running his own office. Or it could be a guy operating a store with three employees."

Added a White House official: "[T]he Republican definition of 'small business' includes many investment managers, lawyers and extremely wealthy people who are not, by any common-sense definition, small-business owners. In fact, more than half of the top 400 earners –- whose average income was $271 million –- would qualify as small-business owners under the Republican definition."

If Ryan's numbers are debatable, so too is the premise of his argument. A trio of progressive-minded small-business organizations -- the American Sustainable Business Council, Business for Shared Prosperity, and Wealth for the Common Good -- have collected thousands of signatures for a petition seeking to repeal the Bush tax cuts and use the resulting revenue for sustained government investment in public infrastructure, renewable energy and education.

Rotella shares the sentiment. He isn't in the millionaire bracket, but he would qualify for Ryan's almost-as-dreaded 44.8 percent rate. He doesn't care.

"I'm actually in the tax bracket where the Bush tax cuts have been beneficial for me," Rotella said. "But my business is better off if that money goes to infrastructure."

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