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The McCain Campaign's Small-business Myth

This week, leading McCain campaign surrogate Carly Fiorina, a top advisor to the Republican candidate, insisted that Barack Obama’s plan to raise ta

This week, leading McCain campaign surrogate Carly Fiorina, a top advisor to the Republican candidate, insisted that Barack Obama’s plan to raise taxes on those who make more than $250,000 a year would hurt small businesses.

“In the Bush tax cuts, if they are repealed, 23 million small businesses will have their taxes raised. Why? Because 23 million small businesses file their income tax as individuals. And so, when Barack Obama blithely says, only the wealthiest are going to be taxed, he is ignoring the fact that 23 million small businesses file as individuals and those small businesses are the only growing sector of the economy right now and small businesses produce 60%, actually it’s more like 70, 70% of the new jobs in this country.”

We’ve been hearing this quite a bit lately. A few weeks ago, after the Obama campaign issued its first general-election ad, emphasizing that Obama had been taught “values straight from the Kansas heartland,” the McCain campaign, in an odd non sequitur, responded, “Barack Obama wants more taxes from 21 million small businesses.”

And the week before that, McCain delivered a speech to the National Small Business Summit, arguing, “Senator Obama’s plans would add to the difficulties of small business in other ways, too. Currently, there are the 21.6 million sole proprietorships filing under the individual income tax. When Senator Obama talks about raising income tax rates on those making over 250,000 dollars — that includes these businesses as well.” Both The Hill and Bloomberg News passed along McCain’s claim as if it were true.

It’s not. In fact, it’s demonstrably false, and like far too many of the McCain campaign’s talking points, has been debunked repeatedly.

But as long as the McCain campaign is going to keep repeating blatant untruths, we might as well go to the trouble of explaining why.

McCain rhetoric, meet reality.

…Obama has proposed rolling back the Bush tax cuts only on “people who are making 250,000 dollars a year or more,” and according to the nonpartisan Tax Policy Center’s table of 2007 tax returns that reported small-business income, only 481,000 of those returns are in the top two income-tax brackets — which include all filers with taxable incomes of more than $250,000 — not 21.6 million.

Jay Newton-Small fleshed this out in even more detail.

Okay, let’s assume there are now 23 million small businesses in the U.S. today (the latest stats I could find were 21.5 million “schedule C” class businesses in 2005). There’s no way that all 23 million of those are netting more than $250,000. In fact, 94.5% of all “flow-through” entities (self-employed folks, which generally tend to be small businesses, though Tiger Woods also falls into this category) had receipts under $100,000 in 2007.

Fiorina was building on a Bush argument from 2004. Bush loved to cite on the stump the plight of the 4.1 million “subchapter S” companies – another catagory of small businesses that have less than 100 shareholders and pay individual income taxes. As my former Bloomberg colleague Ryan Donmoyer — the best tax reporter in town — pointed out, the argument was a bit ridiculous because less than 5% of small businesses who file under sub-chapter S made more than $200,000, Kerry’s threshold in 2004. Putting aside the dubiousness of relying on a stale Bush argument for his tax cuts, even with the sub-chapter S filers added in the total number of small businesses effected by a tax hike on those who net more than $250,000 a year remains a few hundred thousand – nowhere near the 23 million Fiorina claimed.

OK, so McCain, his aides, and his surrogates have been clearly getting this wrong. Either they’re repeating bogus talking points without knowing what they’re talking about, or they’re deliberately lying. Which one is it? Apparently, it’s the latter.

We know this because Time asked Fiorina to explain how she arrived at the 23 million figure. The McCain advisor/surrogate responded:

“My point is this: when Barack Obama says that the Bush tax cuts only helped the wealthy it is factually untrue. It is factually true that 23 million small businesses file as individuals. It is factually true that small businesses create 70% of the jobs in this country. So I honestly won’t even attempt to explain Barack Obama’s economic plan. You ought to ask them that, though.”

So, confronted with reality, the McCain campaign digs in to lie some more. Or, as Newton-Small concluded, “This statement, while factually true, is terribly misleading since only a small percentage of the 23 million small businesses would actually see tax increases and the Obama campaign argues that under his administration small businesses would benefit from his universal healthcare plan, offsetting any tax increases the top tier earners might see. So, when running HP did 23 million = a few hundred thousand? No wonder she got fired.”

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