May 9, 2001

New Treasury Press Release Inflates Impact of
Lowering Top Tax Rate On Small Business Owners

by Robert Greenstein and Isaac Shapiro

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On May 7, the Treasury Department issued a press release entitled "Small Businesses Gain Big Benefit From the President's Tax Relief Proposal: 77% of the tax relief associated with cutting the top rate would go to small business owners and entrepreneurs."(1) The press release also claims that "business owners make up 63% (about .8 million) of the 1.3 million tax returns that will benefit from the new 33% rate."

Several days before issuance of this press release, the Center on Budget and Policy Priorities issued an analysis finding that only one percent of small business owners pay the top rate and that, in fact, there are 15 owners who would receive no benefit from the Administration's tax plan for every one who would benefit from lowering the 39.6 percent rate.(2) This analysis also found that many more small business owners would benefit from extending the child credit to more low-income working families that do not earn enough to pay federal income tax or from improving the Earned Income Tax Credit than from reducing the 39.6 percent rate.

The figures in the Treasury press release and the Center analysis seem to contradict each other. Closer examination of the claims in the Treasury press release shows, however, that the release is carefully crafted to create an impression that lowering the top rate would do far more to help small business owners than is actually the case.

To gain a sense of the degree to which the Treasury public affairs office has taken liberties with the data to inflate these figures, consider the following. Internal Revenue Service data and analysis of that data by Citizens for Tax Justice indicate that, as noted above , only one percent of small business owners pay the 39.6 percent rate ("Small business owner" is defined here in a more reasonable fashion that does not count lawyers and doctors who operate partnerships or investors with business losses but high incomes from other sources.) As the Center's May 3 analysis reported, for every small business owner who pays the top rate, there are 15 who would receive no tax reduction from the Administration's tax plan because their earnings are too low to owe federal income tax. (These owners pay other taxes.) In addition, when the more reasonable definition of small business owner is used, only one-fifth of the taxpayers who are in the 36 percent or 39.6 percent brackets and thus would benefit from lowering the top rate to 33 percent are found to be small business owners. This figure is far below the 63 percent figure the Treasury press release trumpets.

End Notes:

1. U.S. Treasury Department, Office of Public Affairs, May 7, 2001 PO-357

2. Isaac Shapiro and Robert Greenstein, "Reducing the Top Tax Rates: How Much Benefits to Small Businesses?," Center on Budget and Policy Priorities, May 3, 2001.

3. John D. McKinnon, "Bush Argues Cutting Top Tax Rate Helps Entrepreneurs: Data Raise Skepticism," The Wall Street Journal, May 7, 2001.