President Biden has proposed a $2.3 trillion infrastructure plan, to be financed mainly by increases in corporate taxes. Here’s a guide to two misleading talking points that have already emerged.
“This is a massive social welfare spending program combined with a massive tax increase on small-business job creators.”
— Sen. Roger Wicker (R-Miss.), in an interview on ABC’s “This Week,” April 11
Politicians on both sides of the aisle often sing the praises of small businesses. But we were rather surprised to see Wicker claim that increasing the corporate tax rate from 21 percent to 28 percent would be a burden on small businesses. (Before the 2017 tax law, the corporate rate was 35 percent. Biden argues that the reduction was too steep.)
Wicker’s staff noted that Biden’s tax plan does not include a carve-out for small businesses, so “any business, including a small business, that files as a C-corporation would see their tax rate increase from 21 percent to 28 percent,” an aide said. The aide pointed to a National Federation of Independent Business report that cites “federal taxes on business income” as the third most severe issue facing small-business owners, with 20 percent of respondents finding federal taxes on income to be a “critical” issue in operating their businesses.
But here’s the problem with Wicker’s statement: A relatively small percentage of small businesses file as C-corporations. Of those that do, many owe little in taxes, so Biden’s tax increase would not affect them.
Most small businesses are structured as pass-through entities — such as partnerships, S corporations and so forth — meaning that the companies themselves pay no taxes. The owners pay tax on the business income at their individual tax rate and report the business income on their personal tax returns. For virtually all small businesses, especially profitable ones, it makes more sense to organize as pass-through entities. (C-corporations are subject to double taxation of profits, while pass-throughs are taxed only once.)
In 2018, the Treasury Department examined the tax filings of small businesses. In 2010, it found, fewer than 6 percent filed as C-corporations. On top of that, the net income of those small businesses filing as C-corporations was negative; little is likely to have been paid in taxes. (By contrast, large businesses filing as C-corporations reported significant net income.)
According to the Internal Revenue Service, in 2017, small corporations, those with less than $10 million of receipts, reported only about $40 billion of the $1 trillion of income reported by all corporations. And the Federal Reserve reports that very few C-corporations are privately held, let alone being small.
Wicker’s staff responded to this tax data by emphasizing the number of small businesses that file as C-corporations. A random-sample survey of the National Federation of Independent Business found that 20 percent of the NFIB’s members filed as C-corporations. A 2018 Congressional Research Service report, using 2015 data, estimated that nearly 1 million small businesses filed as C-corporations.
None of these numbers, of course, suggest that these firms face “a massive tax increase” from a hike in the corporate tax rate, especially because the Treasury and IRS documents suggest small businesses filing as C-corporations pay relatively little in taxes.
A Wicker aide also argued that Biden is planning further tax increases that might harm small businesses that file as pass-throughs. That might be the case — but that’s a fact check for another day.
“The proposed tax increases in the Biden administration’s infrastructure plan could lead to 1 million fewer jobs in the first two years.”
— Sen. Roy Blunt (R-Mo.), in a tweet quoting a report from the National Association of Manufacturers, April 13
This tweet directed readers to a news release issued April 8 by NAM. But here’s the funny thing: When you read the actual report on which this figure is based, it does not mention Biden’s infrastructure plan at all. Moreover, it includes tax increases that are not part of Biden’s plan, though he mentioned some on the campaign trail.
Jamie Hennigan, a NAM spokesman, said “that link was a quick snippet on our website.” He directed us to a fuller news release, which did not directly link the alleged job losses to the Biden infrastructure proposal.
Essentially, the NAM study looked only at the impact of tax increases, which general economic theory says would result in job losses. But it assumed that the money was spent on general transfer payments — not the job-creating infrastructure proposals pitched by Biden.
Moody’s Analytics, for instance, studied the Biden plan and said growth will slow slightly in early 2022, trimming about 23,000 jobs, as Biden’s proposed tax increases are felt before infrastructure spending really gets started later that year. But then in 2024, there would be an extra 1.5 million jobs created — and an extra million jobs in 2025. A Penn-Wharton Budget model study, by contrast, was more pessimistic about the long-term impact of the plan on the gross domestic product.
“The study looks at tax increases only,” acknowledged John Diamond of Rice University, one of the NAM study’s co-authors. “And the tax increases are not exactly the tax increases in the Biden package but are very similar in many ways. You are correct that in the NAM paper we never mention infrastructure — that is intentional because we did not include it in the simulations.”
He said they were working on a paper that explicitly models and includes the positive effects of infrastructure spending vs. negative impacts of tax increases — though the study will assume that the spending will all be on “pure infrastructure,” which is not necessarily the formal Biden plan.
As for the assessment of a loss of 1 million jobs over two years, the paper assumes that when taxes go up, working becomes relatively less attractive, so people work a bit less. Then the authors totaled up the decline in the number of hours worked and converted that to an equivalent number of full-time jobs.
The paper includes a whole series of caveats about these numbers. But such nuances were lost in the translation to a NAM news release and ultimately a tweet by a U.S. senator.
After our query, NAM, to its credit, changed the wording of the news release and added this note: “The lead sentence was revised to better reflect the full scope of the NAM’s study, which includes corporate tax increases recently proposed by the Biden administration, as well as other tax increases and changes to the tax code under consideration.”
Blunt’s staffers noted that the news release was changed and then, also to their credit, deleted the tweet.
“NAM strongly supports infrastructure investment but opposes changes to the tax code under consideration, like those outlined in our study,” Hennigan said.
The Pinocchio Test
Both of these claims take a modicum of fact and spin it beyond reality.
Blunt tweeted about a study that did not even pretend to be about Biden’s infrastructure proposal or his actual tax proposal. Moreover, the study is missing half of the equation — the jobs that would be created by infrastructure spending. So it’s wrong to claim that it shows the Biden infrastructure plan could cost 1 million jobs in two years. We applaud NAM for fixing its news release and Blunt for deleting the tweet; otherwise this claim would have been worthy of Three Pinocchios.
Meanwhile, a relatively small percentage of small businesses could be affected by Biden’s proposed corporate tax increases, but it’s more likely they would not face what Wicker called a “massive tax increase.” The vast majority of small businesses simply do not file as C-corporations. So Biden’s proposed hike in the corporate tax would be likely to mean little to a small-business owner.
Wicker earns Three Pinocchios.
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