Saturday, October 25, 2008

Factchecking Rightchange's false ad....


A 62 Percent Tax Rate?

In one of its ads, titled "Angry?," Right Change says that "Obama will tax Wall Street firms ... at 35 percent, while many small businesses pay 62 percent."

An outrage, right? The Tax Foundation's Gerald Prante sure thinks so – about the ad's claim, that is. He wrote a blistering critique of the ad, saying, "This is so ridiculous that I'm almost at a loss for words." Prante went on to question's general knowledge of how taxes work, saying: "The people behind this ad are either downright deceitful or too stupid to understand [marginal tax rates]; and given what else they are putting out ... I don't know which it is."

The Tax Foundation, by the way, has a pro-business leaning.

What has Prante so upset? Well, first, the 62 percent number is just plain wrong. No business – of any size whatsoever – would get hit with such a rate. And "many small businesses" wouldn't face a rate anywhere close to that. Most, in fact, wouldn't see their taxes go up at all. The ad compares taxes for corporations and small businesses based on the assumption that some small-business owners file their taxes as individuals, not corporations. But the overwhelming majority of small-business owners that do so wouldn't face a tax increase under Obama's plan, because it proposes no tax hikes for anyone earning less than $200,000 a year, or $250,000 for married couples.

Plus, the ad's claim that small businesses would "keep only 38 cents of every dollar" shows a fundamental lack of understanding of how people are taxed in this country. That claim is doubly wrong: The figure is false, and, even if it were correct, the "every dollar" charge is nonsense.

Let's look at where that 62 percent figure comes from. It appeared in an op-ed, which ran in the Wall Street Journal, by Stanford economist Michael Boskin, the former chairman of President George H.W. Bush's Council of Economic Advisers. Boskin was talking about what would happen to the top marginal income tax rate of 35 percent under Obama. (Obama says he'll raise that to the pre-Bush-tax-cut level of 39.6 percent.)

Here's the deal on that top marginal rate: In 2008, it will affect those with taxable income (in other words, net income after deductions) of more than $357,700. (For 2009 income, the cut off will be $372,950.) About 1 percent of what could generously be considered small-business owners who file taxes as individuals would be in this tax bracket, according to the Tax Policy Center. The top marginal rate is only applied to money earned above that level. So, if an individual has taxable income of $367,700 in 2008, for instance, $10,000 would be taxed at 35 percent. The rest of that person's income is taxed at lower rates.

In order to come up with his inflated figure, Boskin starts with the 39.6 percent top federal marginal income rate Obama has proposed. He then adds California's top marginal rate of 10.3 percent, a rate that is now only applied to those who earn more than $1 million a year, and is the highest of all state income taxes in the U.S. When Boskin's op-ed ran in late July, the state Legislature was debating a controversial hike in some taxes, which would have put a 10 percent rate on taxable income over $321,000, but that proposal failed. If wanted to make a truthful ad, it would need to say that its inflated tax rate applies to millionaires living in California – not "many small businesses."