By Kim Dixon
WASHINGTON (Reuters) - Republicans blasted President Barack Obama on Monday for punishing small businesses with his push to let low tax rates on the wealthy expire, but the truth is more complicated.
In a preview of an end-of-the-year fight over taxes, the parties are squabbling over the impact on "small business" if Obama gets his way and taxpayers earning $250,000 or more lose tax breaks that expire in December.
"Nobody can agree what a small business is," said Will McBride, an economist at the conservative-leaning Tax Foundation, which backs lower taxes for all business.
Facing a tight re-election fight, Obama is pushing Congress to extend for one year most tax cuts enacted in 2001 under Republican President George W. Bush. Those lower rates expire in December.
House Republicans are planning to pass a measure this month to extend all the Bush-era tax cuts, including for the wealthiest.
Obama, stressing tax fairness, said richer taxpayers can afford to pay more taxes, especially at a time of annual deficits topping $1 trillion.
"I might feel differently if we were still in (budget) surplus," Obama said during an announcement at the White House on Monday. "But we've got this huge deficit, and everybody agrees that we need to do something about these deficits and these debts."
Nearly every Republican lawmaker who blasted Obama's pitch used the term "small business" to brand it a disaster.
"Small businesses who are struggling to make payroll and working families who have tightened their belts to meet their budgets cannot afford to be hit with a massive tax increase come January," Republican House Majority Leader Eric Cantor said.
Democrats say that line of attack is misleading, pointing out that 97 percent of small businesses would not be hit, according to nonpartisan congressional estimates.
Also, mega law firms and hedge funds are part of that category - not exactly sympathetic figures for Republicans looking to portray Obama as a job killer ahead of the November 6 election.
Obama wants to let the top two individual tax rates of 33 percent and 35 percent lapse when all lower individual rates enacted in 2001 expire on December 31. Without action by Congress, the top two rates will snap back to 36 percent and 39.6 percent, respectively.
One reason for the debate is an evolution in how businesses organize themselves under the tax code.
Most publicly traded companies pay corporate-level taxes and are organized as so-called C-corporations. But in large part due to tax changes starting in 1986, a rising number of businesses are filing through the individual tax code and are known as S-corporations.
These firms, along with partnerships such as big law and financial firms, fit into this category, as do sole proprietorships.
Tax rates for all of these business types would rise under Obama's proposal if they earn annual income of more than $250,000.
Bill Gale, an economist at the Brookings Institution, noted that Goldman Sachs, before it went public, was classified as a partnership. "A lot of this income is not what we think of as small business," Gale said.
About 750,000 individual taxpayers with business income - 3 percent of all taxpayers with such income - would see their taxes rise under a similar Obama proposal analyzed by the respected nonpartisan Joint Committee on Taxation in Congress.
Democrats often cite this data. "The proposal I make today would extend these tax cuts for 97 percent of all small business owners in America," Obama said.
The same JCT report from last year also noted that the tax hike would have an impact on about 50 percent of the income earned by all businesses that file through individual returns.
Republicans have seized on this, saying the tax hikes will hit 50 percent of all small business income.
However, even the JCT wrote in its report that its figures "do not imply that all of the income is from entities that might be considered 'small.'"
"We get in the box of having a billionaire start a small business treated more generously than a modest wage earner owning shares in a large corporation," said Eugene Steuerle, an economist and former Treasury Department official.
"Still, there are the legitimate concerns of those business people who run a business with a few or a few dozen employees."
(Editing by Dan Grebler)