Small business: Who's better on taxes, Obama or McCain?

McClatchy NewspapersOctober 28, 2008 

ORMOND BEACH, Fla. — As the presidential campaign enters its final week, John McCain and Barack Obama each argue that his tax plan is better to help the ever-suffering small businessman.

Tax experts, however, suggest that the candidates' blueprints for helping small business are virtually identical for all but 2 percent to 3 percent of the highest-income small businesses. For them, McCain's plan is more generous.

The issue has been a campaign centerpiece since the emergence earlier this month of "Joe the Plumber," an Ohio voter who'd benefit under Obama's plan but favored McCain's because it preserves the current tax brackets.

"Joe's dream is your dream," McCain said Monday night at a rally in Pottsville, Pa. "It's to own a small business that will create jobs, and the attacks on him are attacks on small businesses all over this nation. They should be ashamed."

Here's what the candidates actually propose. McCain wants to leave in place President Bush's tax cuts of 2001 and 2003 that lowered the top tax bracket from 39.6 percent to 35 percent and lowered the capital-gains tax, a tax on profits, to 15 percent.

Obama would let those tax cuts expire on Jan. 1, 2011, as called for under current law, for individual tax filers whose adjusted gross income exceeds $200,000, and for joint filers whose adjusted gross income is more than $250,000.

The Democratic nominee assured a rain-soaked crowd Tuesday in Chester, Pa., "If you make less than a quarter of a million dollars a year, which includes 98 percent of small business owners, you won't see your taxes increase one single dime."

Both candidates' comments have created confusion by giving the impression that the term "small business" is somehow a special tax designation. It's not.

"People think that small businesses pay a tax and their tax is being increased," said Eric Toder, a tax analyst at the Tax Policy Center, a non-partisan research organization in the nation's capital. "There is a perception that more people are affected by this than actually are."

So who's right?

Roughly 75 percent of small businesses file as individual tax filers, not corporations, and most report their business income using various tax forms, called schedules, for income from business ventures, farming or rental properties.

Using these three income-reporting categories, the Tax Policy Center has concluded that 1.9 percent of all individual filers reporting business income would see their taxes go up under Obama's plan. Of those who get more than 50 percent of their income from business ventures, 2.7 percent would pay higher taxes.

As both campaigns toured Florida last week, small business owners generally acknowledged that Obama's plan wouldn't impose new taxes on them.

In a sign of why the tax issue seems to offer traction for McCain, however, several business owners told McClatchy they simply distrust Obama on taxes.

"I'm opposed to higher taxes of any kind," said Bob Long, the owner of Marine Concepts, a boat design firm in Cape Coral, Fla., with 17 employees. His company doesn't report profits in excess of the $250,000 threshold for the higher rate under Obama's plan.

Long recalled how a seemingly small adjustment in 1991 — the imposition of a 10 percent federal luxury tax on boats valued at more than $100,000 — did enormous damage before it was repealed in 1993.

"I've seen once how higher taxes killed a business," he said.

Rick Rivers, the owner of A Floral Boutique in Ormond Beach, had to let go one of his eight employees recently, the first layoff in 25 years. Saying Obama's tax increases "don't affect most of us, at least not someone like me," Rivers said he still worries that payroll taxes will rise.

Obama has suggested increasing Social Security taxes, collected on income, by 2 to 4 percentage points on people earning more than $250,000. But Rivers is concerned that he'll eventually go after lower salaries, too.

"Now's not the time for that," he said.

On the campaign trail, candidates often invoke sole proprietors and mom-and-pop shops when discussing small businesses. The U.S. Small Business Administration, however, uses a longer yardstick. It defines a small business as having fewer than 500 employees. That broader definition makes the accusation of who's potentially in line for tax increases more complex.

"It depends on your definitions, absolutely," said John McDowell, an SBA spokesman. "It gets muddy very quickly."

The National Federation of Independent Business, one of the leading voices for small businesses, said its own internal survey found that about 10 percent of small companies could pay higher taxes under Obama's plan.

"When you dig down into those numbers, you have to ask not how many, but who," said Bill Rys, the federation's tax policy counsel.

The companies that are most at risk of higher taxes, he said, employ from 20 to 250 workers, because they're much more likely to have tax liabilities that exceed $250,000.

Thomas Crowe, the owner of Allstar Building Supply Materials in Ormond Beach, used to have one of those companies. He's let go 130 of his 180 employees in the past year, seen health insurance costs triple in nine years and is spending five times what he used to spend on insurance.

Though admitting that he wouldn't be taxed at a higher rate now under the Obama plan, Crowe aspires to have the kind of income that Obama wants to tax at higher rates.

"I did at one time, and I hope to be back in that scenario," he said.

(Lightman reported from Florida. Hall reported from Washington)

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