[Congressional Record (Bound Edition), Volume 154 (2008), Part 13]
[Senate]
[Pages 18530-18535]
[From the U.S. Government Publishing Office, www.gpo.gov]




                               TAX POLICY

  Mr. GRASSLEY. Madam President, today I wish to continue my 
discussions about one of the big choices facing voters this fall. That 
choice is which of our colleagues, Senator McCain or Senator Obama, 
should we follow in terms of future tax policy. I speak as ranking 
member and former chairman of the Committee on Finance that has 
jurisdiction over tax policy.
  In recent weeks--when I say in recent weeks, I mean in July because 
we weren't in session in August--I have talked about the history of 
party control and the likelihood of broad-based tax increases. I will 
use the tax increase thermometer--and that thermometer is up here--to 
point out history. I have discussed the specific precedent of the 1992 
campaign with its promise of middle-class tax cuts and the 1998 world 
record tax increase that hit taxpayers above $20,000. I have referred 
to a case of tax hike amnesia, and I put up my famous Rip Van Winkle 
chart. I have discussed the impact of the McCain and the Obama plans, 
and in July I also talked about how the McCain and Obama plans would 
affect seniors and middle-income families. Today, I wish to focus on 
small business and the effect on small business of the tax policies of 
the respective Presidential candidates.
  There has been a lot of controversy over the years about the effect 
of marginal tax rate increases on small business. It first arose back 
in 1993. At that time, President Clinton and the congressional majority 
Democrats pushed through legislation that retroactively raised the top 
marginal income tax rates. The rate was 31 percent. Under the 1993 
bill, two new higher rates went

[[Page 18531]]

into effect: the 36-percent rate and the 39.6-percent rate, and that is 
where it was until the 2001 tax bill.
  One of the criticisms of those higher marginal tax rates passed back 
in 1993 was that these rates would harm small business. Did they harm 
small business? Well, I am here to say they did, but I have to back up 
what I am saying.
  In the year 2001, Chairman Baucus--now the Democratic chairman of the 
committee I used to chair--Chairman Baucus and I crafted a bipartisan 
package of marginal rate reductions. The first part of 2001, I was 
chairman of that committee, and Chairman Baucus was the ranking member. 
So in 2001, we had this bipartisan package of marginal tax rate 
reductions. Part of that package brought the top rate from that 39.6 
setup in 1993 down to 35 where it is now.
  Another part of the package lowered the 36-percent rate to 33 
percent. Although the nonpartisan Joint Committee on Taxation, in its 
distribution analysis, concluded that the legislation improved the 
progressivity of the Tax Code, the top marginal rate reductions were 
controversial.
  Many of the liberal Members of this body and in the punditry decried 
the marginal rate reductions as a tax cut for the wealthy. Many of the 
press echoed those criticisms. They focused on the top rate reductions 
and defined the bipartisan, broad-based tax relief as ``the Bush tax 
cuts for the rich.'' These critics and Members who shared their view 
failed to examine the data on the whole bill, and if they had, they 
would have come to a different conclusion.
  The fact that the Democratic Presidential candidate this year is 
embracing most of the policy from the bipartisan deal should give these 
liberal critics some pause. Senator Obama's campaign tax plan confirms 
what I said many times over the last 7 years. It confirms that the bill 
Chairman Baucus and I crafted in 2001 was a bipartisan plan that would 
stand the test of time.
  Since the top rates of 35 percent and 33 percent were the source of 
considerable opposition back then in 2001, there was a lot of debate 
about their merits. Aside from the general economic benefits of the 
increased incentives for work and investment, Chairman Baucus and I 
focused on the benefits to small business. On Monday, August 20, 2001, 
Chairman Baucus and I released a statement on the Treasury Department's 
analysis of that 2001 tax bill, and I will quote from part of that 
press release that Senator Baucus and I put out:

       Owners of sole proprietorships, partnerships, S 
     corporations, and farms will receive 80 percent of the tax 
     relief associated with reducing the top income tax rate of 36 
     percent to 33 percent and 39.6 percent down to 35 percent. 
     Senators Baucus and Grassley said most of the job growth over 
     the last decade has come from small business. Experts agree 
     that lower taxes increase a business's cash flow which helps 
     with liquidity constraints during an economic slowdown and 
     could increase the demand for investment and labor.

  That is the end of the quote of Senator Baucus's and my press release 
commentary on the 2001 tax bill impact on small business.
  Madam President, I ask unanimous consent at this point to have 
printed in the Record a copy of that August 20, 2001, Baucus-Grassley 
press release.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:
                                                      U.S. Senate,


                                         Committee on Finance,

                                    Washington, DC, Aug. 20, 2001.

  Baucus, Grassley, New Analysis Shows Tax Cuts Help Small Businesses

       Washington.--Sen. Max Baucus, chairman of the Senate 
     Finance Committee, and Sen. Chuck Grassley, ranking member, 
     today said a new U.S. Treasury Department analysis shows that 
     farms, small businesses and entrepreneurs will receive most 
     of the tax relief from cutting the top marginal tax rates.
       ``I'm pleased this analysis shows the tax cut we passed 
     will provide relief for farmers and ranchers and our 
     agriculture community, as well as small businesses and 
     entrepreneurs throughout our country,'' Baucus said. ``My 
     State is an agriculture and small business State, and it's 
     heartening to know that this tax cut will put money back in 
     the economy and help create more jobs.''
       Grassley said, ``One of the goals of our bipartisan tax cut 
     was reducing the tax burden for small businesses. ``That's 
     important because small businesses create most of the jobs in 
     this country. The new analysis shows that we succeeded in our 
     desire to re-kindle the fire fueling the small business 
     engine.''
       At the Senators' request, the Treasury Department's Office 
     of Tax Analysis calculated that when the new tax relief law 
     is fully phased in, entrepreneurs and small businesses--
     owners of sole proprietorships, partnerships, S corporations, 
     and farms--will receive 80 percent of the tax relief 
     associated with reducing the top income tax rates of 36 
     percent to 33 percent and 39.6 percent to 35 percent. Such 
     business owners make up 62 percent (about 500,000) of the 
     800,000 tax returns that will benefit from the new 33 percent 
     and 35 percent rates, according to the analysis.
       Baucus and Grassley said most of the job growth over the 
     past decade has come from small businesses, noting that 80 
     percent of the 11.1 million new jobs created between 1994 and 
     1998 were from businesses with fewer than 20 employees, and 
     80 percent of American businesses have fewer than 20 
     employees. Experts agree that lower taxes increase a 
     business' cash flow, which helps with liquidity constraints 
     during an economic slowdown and could increase the demand for 
     investment and labor, the senators said.
       An October 2000 report by the National Bureau of Economic 
     Research, a well-regarded non-partisan organization, entitled 
     ``Personal Income Taxes and the Growth of Small Firms,'' says 
     plainly that when a sole proprietor's marginal tax rate goes 
     up, the rate of growth of his or her business enterprise goes 
     down, the senators said.
       The bipartisan tax cut bill responded to the fact that 
     individual income tax collections were near an all-time high, 
     even higher than some levels imposed during World War II. 
     Baucus and Grassley said individual rate cuts are important 
     relief for small businesses because most small business 
     owners and farmers operate their businesses as sole 
     proprietorships, partnerships, Limited Liability, 
     Corporations or S corporations. The income of these types of 
     entities is reported directly on the individual tax returns 
     of the owners. A rate reduction for individuals reduces rates 
     for farms and small businesses.
       Baucus and Grassley were instrumental in passing the 
     bipartisan tax cut legislation.

                TABLE T08-0164.--DISTRIBUTION OF TAX UNITS WITH BUSINESS INCOME BY STATUTORY MARGINAL TAX RATE ASSUMING EXTENSION AND INDEXATION OF THE 2007 AMT PATCH, 2009 \1\
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                           All tax units                Tax units with business income \2\         Percent of tax units with business income \3\     Business
                                                 --------------------------------------------------------------------------------------------------------------------------------    income as
       Statutory marginal income tax rate             Number        Percent of        Number        Percent of                     Greater than    Greater than    Greater than   percent of AGI
                                                    (thousands)        total        (thousands)        total      Greater than 0    10% of AGI      25% of AGI      50% of AGI          \3\
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Non-filers......................................          20,758            13.8             999             2.9             4.8             3.7             3.3             3.0             7.5
0%..............................................          23,434            15.6           6,960            20.0            29.7            28.6            26.0            22.8            62.7
10%.............................................          22,375            14.9           4,740            13.6            21.2            16.2            12.6             8.9            12.1
15%.............................................          49,522            33.0          11,024            31.7            22.3            12.5             7.8             4.5             6.9
25%.............................................          25,506            17.0           6,662            19.2            26.1            12.0             7.1             4.2             6.7
26% (AMT).......................................           2,434             1.6           1,160             3.3            47.6            21.0            12.9             7.8            11.4
28% (Regular)...................................           3,137             2.1           1,175             3.4            37.4            20.6            15.4            10.4            13.0
28% (AMT).......................................           2,164             1.4           1,353             3.9            62.5            38.2            29.6            20.5            21.5
33%.............................................             335             0.2             206             0.6            61.7            46.3            38.0            29.9            31.6
35%.............................................             577             0.4             457             1.3            79.2            57.6            50.3            40.7            38.8
All.............................................         150,241           100.0          34,736           100.0            23.1            15.2            11.4             8.4            14.7
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Source: Urban-Brookings Tax Policy Center Microsimulation Model (version 0308-5).
\1\ Calendar year. Assumes extension and indexation of the 2007 AMT patch. Tax units that are dependents of other tax units are excluded from the analysis.
\2\ Includes all tax units reporting a gain or loss on one or more of Schedules C, E, or F.
\3\ Business income is defined as the sum of the absolute values of the gains or losses reported on Schedules C, E, and F.

  Mr. GRASSLEY. I wish also to thank my friend, Chairman Baucus, and 
those on the other side for sticking with me on these marginal rate 
reductions over the years. With a strong impulse to raise marginal 
rates in the

[[Page 18532]]

Democratic caucus, I know these votes were not easy. I know that small 
business folks in the State of Montana and other Members who supported 
it are also very grateful because it has really helped small business, 
besides giving parity between proprietorships and corporations which 
have a 35-percent rate, and there is no reason to tax businesses that 
are sole proprietorships more than big fat corporations.
  Today, now, 7 years later, we find ourselves in the same debate. The 
data and implication of it are still very important in debating the 
merits of the stated top rates of 35 percent and 33 percent. Senator 
McCain's position is that we should not raise those rates, especially 
in a time of the economy slowing down. Senator Obama insists that we 
raise those top rates. This is a sharp tax policy difference between 
the two potential Presidents.
  As ranking member on the tax-writing Finance Committee, it is my duty 
to clarify this important debate. Our constituents have a right to be 
informed in an intellectually honest manner on this very important 
question. So, Madam President, let's take a look at this small business 
issue.
  The first question we need to consider is what is small business. The 
second question would be what role do these small businesses play in 
our overall national economy. After that, we need to get a handle on 
which small businesses are affected by the higher rates that Senator 
Obama has proposed. Finally, we need to get a sense of how the small 
businesses are affected on the short term and long term. I am going to 
deal with each one of these questions right now.
  So the first question: What is a small business? It is not a precise 
answer. In one way, some on the other side have said small businesses 
that matter are only those with owners who earn less than $200,000 to 
$250,000. To those folks at the local hardware store, if one of the 
owners or the sole owner owns over $250,000, no matter how many folks 
it employs, it is the same as a Home Depot or a Lowe's. Those of us 
from the heartland know the definition of small business is not limited 
to those whose owners make $250,000 or under. For us, it depends on 
whether the business is locally based. It depends on whether the 
business finances its growth from its own earnings. Conversely, to 
folks from small towns such as myself, big business is generally the 
companies that finance themselves through the stock market.
  The reason the distinction is important for public policy issues such 
as the level of taxation is that we value local or regionally based 
businesses. The folks who own those businesses are drawn from the 
community. They attend the local Rotary clubs. They support the local 
little leagues.
  Small business, as I see it, is a stabilizing yet very dynamic social 
force and just not an economic being. So when we talk about small 
business, we should not use any artificially low levels of income. We 
should use a commonsense definition of small business. There is too 
much at stake to demagog the definition.
  It seems a good place to go for a definition of small business would 
be the Small Business Administration, the SBA. For most Federal 
policies, as a rule of thumb, the SBA would tell you it would be a 
privately held business with 500 or fewer employees. When we are 
considering tax policy--specifically the tax rate applicable to 
business--we have two categories. The first one is regular 
corporations. Virtually all big businesses--that is, publicly traded 
companies--are taxed under the regular corporate rate schedule.
  There are several Tax Code rules dealing with small business. In 
general, the Tax Code treats those businesses that go to the capital 
market differently from those businesses that are financed by their 
owners. There are special rules for depreciation and there are special 
pension rules. Most important, however, are the rules that allow small 
business to avoid the double taxation that applies to corporate 
earnings. Owners of certain kinds of small business corporations, known 
as S corporations, can elect to be taxed as proprietorships or 
partnerships. That is, these corporate shareholders include the 
business income on their personal income tax returns. In general, an S 
corporation can have no more than 100 shareholders. In the case of 
families or pension plan owners, the number of shareholders can, in 
fact, be larger.
  So with respect to the first question, I think we are on pretty solid 
ground in identifying any small business as a privately held business 
with 500 or fewer employees and, of course, the vast majority of them 
probably only a handful of employees, and maybe all within the family. 
You won't find much controversy, I believe, over that definition 
because it is one that we use here a lot on a lot of tax policy when it 
comes to SBA-type legislation.
  Let's go to the second question, which is what is the economic impact 
of small business. No one disputes the fact that small business creates 
most of the jobs in America. According to the Small Business 
Administration's Office of Advocacy, small businesses generated 60 to 
80 percent of the net new jobs annually over the last decade. I think 
that is important to think of. Again, over the last decade, small 
business has generated 60 percent to 80 percent of the new jobs.
  Where are tomorrow's jobs going to come from? The answer is the 
largest share of future jobs is going to come from small business 
employers. I recommend that my colleagues consult the Small Business 
Administration's Office of Advocacy's ``frequently asked questions,'' 
which is available on the Internet at www.sba.gov/advo.
  We should not be surprised that small businesses create the lion's 
share of the new jobs. A lot of American economic might, a lot of know-
how and dynamism, resides in small business. According to the latest 
Treasury data, flow-through small business accounts for 93 percent of 
all businesses, 36 percent of business receipts, 34 percent of the 
wages paid, and 50 percent of all business income. I have a chart here 
that shows the growth of these flow-through small businesses since the 
year 1980. You can see it. The solid line, the number of businesses--
the large dashes are total receipts and the small dashes are net income 
less deficit.
  While I have focused on the flow-through, keep in mind that many of 
the other small businesses would be affected by the top marginal rates. 
Let's focus on the small business data. We have another chart here. The 
non-flow-through small businesses are what we call C corporations. 
These entities are taxed like conventional corporations but are not big 
publicly traded businesses. So the owners are paid through salary and 
dividends. These small businesses account, as you can see, for about 10 
percent of the total receipts.
  In terms of business receipts, then, the combination of flow-through 
and regular corporations accounts for about 46 percent, or almost half, 
of the Nation's private sector income. These regular small business 
entities account for 13 percent of the wages paid, and when combined 
with flow-throughs, the small business sector accounts for 47 percent 
of wages paid. That is almost half of the wages paid in the private 
sector jobs. In terms of net income, these regular small business 
entities account for 2 percent of the net business income. But when 
combined with the flow-throughs, the small business sector accounts for 
52 percent of net business income. So that is over half of the net 
business income in our Nation. In other words, small businesses are a 
very vital, important, and productive part of our economy.
  We may use the adjective ``small'' to describe this part of the 
business sector of our Nation, but the economic impact of these 
businesses, then, as you follow this chart, is not small. Like the 
answer to the definition of small business, I don't think many on the 
other side would quarrel with the notion that small business is a key 
part of our economy.
  We have answered the first two questions, the definition of small 
business and its economic impact. Now, we need to ask that very vital 
third question that is being dealt with or being affected in this 
campaign for the Presidency. How are small businesses taxed? How should 
they be taxed? And what is the impact of that tax?

[[Page 18533]]

  First off, small business owners pay the tax. The individual tax 
rate, at the owner's level, is the rate paid by small business. These 
businesses are described as flow-throughs because the business income 
and the tax burden flows through to the business owner. I have a chart 
here that shows how the small business owner is taxed. It may look a 
little complicated, but it is not as complicated as it looks. It shows 
the business entity. It could be a partnership or an S corporation or a 
proprietorship. The business gets its cash from four sources. The first 
is sales. The second is debt. As a practical matter, a business may be 
able to access credit only if its owners are willing to guarantee the 
debt. The third source is the owner's investment. The fourth is 
retained aftertax profit. That aftertax profit is a very important part 
of the economic viability of small business. I emphasize ``aftertax.'' 
These are sources of cash for the business.
  The business uses its cash to pay workers. It uses this cash to pay 
other expenses, such as utilities, rent, and supplies. A business 
either makes a profit or a business suffers a loss. If it makes a 
profit, the profit is taxed at the owner's level; it flows through to 
the owner. At that point, the Federal Government takes or gets its 
share. The aftertax profit then, of course, is available to the owners. 
That aftertax profit, I will say once again, is a very important 
factor. That is where tax policy in this Presidential debate is very 
important.
  Currently, the top two Federal tax rates are, since 2001, 33 percent 
and 35 percent. Senator McCain wants to keep the rates right there. 
Senator Obama wants to raise statutory rates to 36 percent and 39.6 
percent, where they were set between 1993, under President Clinton, 
until 2001. In addition, Senator Obama also wants to restore kind of a 
hidden marginal rate increase; that was referred to until recently in 
part of the Tax Code, known as PEP and Pease. With these additional 
add-ons of a hidden marginal tax rate, their real marginal tax rates 
actually go up above 39.6, to 40 percent and 41 percent respectively.
  Senator Obama has also proposed to raise the Social Security tax on 
the same group of small business owners by 2 percent to 4 percent. 
Recently, however, Senator Obama modified his tax plan to defer the 
Social Security tax increase. If we set aside this future Social 
Security tax increase, the taxes owed by small business owners would 
rise by as much as 21 percent and 17 percent respectively. I have a 
chart that shows the difference between the current top rates, which 
Senator McCain would keep, and the increase in the rates proposed by 
Senator Obama. So the blue line is Senator Obama, and the red line is 
Senator McCain.
  For that same group of taxpayers, Senator Obama proposes, in 
addition, to tax dividend income at 20 percent instead of 15 percent. 
That is a 33-percent increase.
  So for these regular non-flow-through small business owners, the 
amount of tax owed on their business income would rise at a range of 
somewhere between 17 percent to 33 percent.
  As with the answers to the questions of definition and economic 
impact of small business, I don't think folks on the other side would 
dispute what I have said about how small businesses are taxed.
  Now we come to the fourth question. That question is: What is the 
relationship between the top marginal tax rates and small business 
activity? Put another way, how much small business activity will be 
affected by the increased rates Senator Obama proposes? Unlike the 
first three questions, the answers to this question have been very 
controversial.
  Over the years, folks who are hostile to marginal rate reduction have 
pointed to one statistic. They have referred to the percentage of small 
business tax filers who fall in the top two rates. For instance, they 
cite a statistic from the Tax Policy Center that concludes that only 
1.9 percent of the filers with business income pay the top two marginal 
rates.
  According to the Tax Policy Center analysis, that percentage is 
roughly three times the percentage of tax filers in the general 
population. They will state that the proportion of small business 
owners in the top two brackets is roughly similar to that of the 
general taxpaying population. The opponents of marginal rate relief 
will use this data to conclude the small business owners' tax profile 
is similar to the nonbusiness taxpayer profile. Since the tax profile 
is similar, the general redistribution argument applies. The bottom 
line is that opponents will argue that raising marginal tax rates on 
small business owners makes the tax system more progressive.
  For the opponents of marginal rate relief, that is where the 
discussion ends. It comes down to the view of tax fairness from their 
perspective. Although the statistics show small business owners are 
three times more likely to be in the top two brackets, that matters not 
one whit to the opponents. The rates must go up and the revenue must be 
spent on expanding Government. For an example of this perspective, I 
recommend that my colleagues consult the article ``Big Misconceptions 
About Small Businesses and Taxes'' from the Center on Budget Policy and 
Priorities, dated August 29, 2008, available on the Internet at 
www.cbpp.org.
  The political point of the opponents boils down pretty simply. This 
small group of filers is very well off. So other than them, who cares 
if the rates go up? That is good politics. When you are talking about 1 
percent or 2 percent of the population versus the rest, your theory is 
redistribution. You are going to be making an easier political case. 
That is where they leave it.
  There is a huge assumption that makes this argument so very dangerous 
and has economic impacts in the end. The assumption is that since the 
number of filers is limited to roughly 2 percent, the business activity 
is likewise limited.
  The assumption is extremely dangerous economic policy. Why? I will 
give two reasons. One, the 2 percent understates the number of small 
businesses affected. Second, the assumption assumes any negative effect 
of removing resources from small business. You don't have a lot of 
room, as the chart shows, to play with small business. They don't go to 
Wall Street and sell their stuff. They have to accumulate their own 
capital.
  Let's go to that first dangerous assumption that I just proposed of 
understating the number of small businesses affected by that 2-percent 
figure. Distribution tables are like any other estimate. Inside this 
beltway, distribution tables are a fetish. Many on the left side of the 
political spectrum worship at the altar of distribution statistics. 
They treat it as the only measure--the only measure--of whether a tax 
policy proposal is good tax policy or bad tax policy. Economic 
consequences, what do they matter? But distribution tables are an 
analytical tool meant to inform a tax policy debate. Distribution 
tables are a snapshot. Like any other snapshot, the analysis is 
limited.
  Let's take a look at the oft-cited Tax Policy Center distribution 
tables. The table references a total of roughly 35 million business tax 
units. That is a proxy for tax returns and households. About 30 percent 
of that total, roughly 8 million tax units, represent folks who pay no 
income tax for that year. The footnote to the table states that all 
business income is defined as the sum of ``gains or losses reported on 
Schedules C, E, and F.'' Those are where the flow-through income is 
reported on the owner's tax return.
  When you look at small business gains and losses, it is quite 
revealing. Small businesses are at the cutting edge of our capital 
system. With capitalism comes the viability of the business cycle. 
Small businesses are more susceptible to the good and bad years that 
come with business cycles. One year a small business may do very well; 
the next year might be a year of loss.
  As evidence of this volatility, I would like to refer to the SBA data 
on small business survival rates. You will find this on the frequently 
asked questions document I referred to, and you have a citation. 
According to SBA, two-thirds of small businesses survive at least 2 
years; 44 percent of small businesses survive at least 4 years. What 
this

[[Page 18534]]

means is that over time many small businesses rise and some fall.
  By the way, mobility within income tax brackets is something that 
occurs to a great degree in the United States because of the dynamics 
of our society and our economy. So think about it. How many people in 
their midtwenties stay in the same bracket all the way through 
retirement? The mobility of income of small business is a subset of the 
overall income mobility in the U.S. population.
  Treasury data clarifies the TPC snapshot, the Tax Policy Center 
snapshot. I have another chart. This chart shows that when gain and 
loss is considered, the snapshot changes very dramatically. So pay 
attention to this chart as I go through it.
  For all flow-through taxpayers, 8 percent fall in the top two 
brackets. For taxpayers with active, positive flow-through income, the 
percentage is roughly the same, about 7 percent. For taxpayers with 
flow-through income that is greater than half their wage income, the 
percentage is the highest, at 9 percent.
  So keep in mind we are dealing with a moving target when we talk 
about the 2-percent figure. Some businesses will produce losses for 
their owners one year and income in another year. So the business 
owners caught in the snapshot may not be the same business owners in 
another snapshot.
  The second assumption about the 2-percent filer argument is even more 
dangerous. That assumption is, since a small percentage of tax filers 
are affected, the impact on small business activity is somehow trivial.
  How will the higher marginal rates remove resources from small 
business you might ask? It is a simple answer. Let's go back to the 
chart that shows how small business works. If the amount paid in taxes 
increases somewhere, as I have said, between 17 percent to 33 percent, 
the tax take of the business rises as well. It comes out here. Let's go 
through an example.
  I am going to use another chart. This taxpayer filer jointly owns a 
small business and earns $500,000 of business income. For purposes of 
this example, we will assume all of that taxpayer's income comes from 
the small business. As an aside, this assumption favors the opponents 
of marginal rate relief. Why? Because most small business owners have 
income from other members of the household and income from other 
sources. In that more likely scenario, the marginal rate hikes would 
bite even harder because more business income is pushed into the higher 
brackets.
  Under this example, the small business owner pays $146,700 under 
current law. Senator McCain's plan leaves this level of taxation in 
effect. Under Senator Obama's proposal, the small business owner's 
taxes would go up by $20,000. That is a tax increase on this small 
business owner of roughly 13 percent.
  The tax increase would present the small business owner with a 
$20,000 current problem. The small business owner's current problem is 
how does he or she alter his or her business to make up the $20,000 he 
or she has lost to Senator Obama's higher tax rates? Can he or she grow 
enough sales to pay the extra tax? Maybe, but maybe not. Can he or she 
replace a $20,000 machine? Maybe maybe not. Can he or she cut back on 
the payroll? Maybe but maybe not.
  How about the future? Any good business person has to project how 
their business is working. Any investment's value is predicated on how 
much income the investment is likely to produce in the future. If 
income is projected to go down, then the value of the investment 
declines.
  Higher taxes negatively affect the net income from an investment. 
Small business owners have choice about where to put their capital. If 
taxes press down on the projected net income, then the value of the 
small business investment declines. Everything else being equal, a 
small business owner is less likely to leave the after-tax profit in 
the business. Likewise, the small business owner is less likely to make 
future investment in the business.
  My point is, the tax increase Senator Obama is proposing has a very 
real cost to small business owners. And my entire remarks have been 
directed toward the tax policies on small business because they are the 
engine of employment and economic growth.
  What are the businesses Senator Obama is proposing to hit with this 
tax increase; that is, which businesses are owned by taxpayers making 
over $250,000? How many employees do they have?
  I have another chart. It is based on data from the National 
Federation of Independent Businesses, and we refer to that as the NFIB. 
It is a national small business organization. The NFIB has 350,000 
dues-paying members. They take surveys of their members and other small 
business folks. I have the latest survey that deals with the finance 
questions from the year 2007. This chart contains the results of 
question No. 12. The question identifies, as we can see from the chart, 
groups of small business owners by household income with the size of 
their firm by the number of employees. Household income includes income 
from other adult members of the household. If you take a look at the 
responses, you can compare firm size with income level of the owners.
  Here we have $250,000 and above. Those are the folks who are targeted 
for the tax increase, and that would raise the amount owed to the 
Government between 17 percent under one scenario and 33 percent under 
another. The survey indicates that 6.4 percent of the business owners 
of firms with one to nine employees--so small business--one to nine 
employees would be hit by Senator Obama's tax increase.
  Now move a step over and you are going to find that about 21 percent 
of the owners of firms with 10 to 19 employees would be hit by the tax 
increase. That is the 20.6-percent figure you see. Move one step to the 
right and we find 40 percent of the owners of firms with 20 to 249 
employees would be hit by the tax increase; 20 to 249 employees, 40 
percent hit. Forty percent of the owners of the small business firms 
then would have increases of 17 percent to 33 percent.
  There seems to be armies of hard-working tax analysts in this town 
who work for think tanks of the liberal variety. If you look at the 
analyses of the tax data, the armies of the left clearly are far more 
numerous than the armies of the right and the middle. And I give them 
credit for their hard work and dedication. I am sure they are poring 
over all this data.
  Since the redistribution dogma is what floats their boats, they will 
probably take a hostile attitude toward the data I have just cited. 
Anticipating the attacks of green-eye-shaded armies of the left, I 
think we can trust the survey statistics.
  NFIB has been conducting these surveys for years. I cannot think of 
any reason why respondents to the NFIB survey would inflate or deflate 
their income statistics. So I think this 40-percent snapshot is a very 
solid figure.
  The data above relates to taxpayers of $250,000 and above. Since 
Senator Obama's advisers have said his current proposal would raise 
taxes on single taxpayers above $200,000 on a rough basis, it is fair 
to look at those small business owners as well. If you do that 
calculation, then on a combined basis, Senator Obama's proposed tax 
increase would hit even more small business owners.
  So let's go back to NFIB question No. 12. For small businesses that 
employ one to nine workers, 12 percent would be hit by Senator Obama's 
higher taxes. For small businesses with 10 to 19 workers about 27 
percent would be hit by the higher taxes. For small business owners 
with 20 to 249 workers, 50 percent--half of the small businesses--would 
be hit by Senator Obama's tax plan.
  I want to get to the scariest part. As the chart shows, the 
percentage of small business owners hit by Senator Obama's higher taxes 
goes up as the number of employees goes up. So it is fair to say these 
figures probably understate the impact of the higher marginal tax rates 
on the remaining small businesses, meaning those between 250 and 500 
employees. Moreover, like the

[[Page 18535]]

distribution tables, the survey obviously is a snapshot. With small 
businesses alternately running gains and losses over time, then the 
higher rates will hit a larger number of small business owners.
  With the conservative nature of this data in mind, let's take another 
look at the economic profile of the small business owner Senator Obama 
has targeted for a tax increase. Every year, the SBA prepares a report 
to the President on small business economy.
  The last report we have was submitted to President Bush in December 
of last year. It covers data for the previous year--2006. For 2006, the 
entire private sector workforce growth occurred in small businesses 
with 500 or fewer employees. For 2006, over half of America's private 
sector employees worked in these firms--over half. For 2006, these 
small businesses accounted for over half of the Nation's private sector 
gross domestic product.
  Drill down deeper into the data, and you will be worried even more. 
Two-thirds of that small business payroll came from firms that employ 
between 20 and 500 workers. If we go back to the NFIB question, we will 
find that the owners of these small businesses are the ones most 
targeted by Senator Obama's tax increase proposal.
  Finally, Mr. President, I don't want you to take my word for it. 
Listen to what small business folks have said about the importance of 
lower marginal tax rates. Take a look at the chart I am now putting up. 
The chart is a copy of a letter dated March 14, 2003, from three 
principal small business grassroots organizations: the National 
Federation of Independent Businesses, the Small Business Legislative 
Council, and the Small Business Survival Committee. I would like to 
read the second paragraph of that letter. It may be too small for you 
to see on the screen, but it sums up the reality of the effects of the 
marginal tax rates on small business.

       Approximately 85 percent of small businesses file their tax 
     returns as individuals. An increase in tax refunds means 
     small firms will have more resources and more capital to put 
     back into growing their businesses. A series of studies by 
     four top economists examined the effect of the tax rate cuts 
     on sole proprietors. Their results indicate that a 5 percent 
     point cut in rates would increase capital investment by 10 
     percent. And they found that dropping the top tax rate from 
     39.6 to 33.2 percent would increase hiring by 12.1 percent.

  That kind of tells you what a business force small business can be 
and how tax increases are negative or tax decreases are positive for 
small businesses to hire and to grow. What these small business groups 
said was that their tax policy priorities included a reduction in top 
marginal rates. You see it there in the letter from small business 
advocates.
  Now, let's think about this. As the small business folks say in their 
letter, there is a link between tax relief, economic growth, and jobs. 
We have seen the evidence of that linkage in the year past. Tax relief 
kicked in, the economy started growing, and jobs started coming back. 
Why would we want to go in reverse gear?
  Senator McCain and Senator Obama agree on the policy objectives of 
growing jobs. Why would you aim a 17-percent or 33-percent marginal tax 
rate increase at the businesses that grew all the jobs in the most 
recently studied year? Senator McCain's plan recognizes this job-loss 
risk. Senator Obama's plan goes in the opposite direction.
  Let me conclude with a challenge to the proponents of raising 
marginal rates on small business. When I say critics, I am referring to 
political leaders, pundits, and even some in the media. I think the 
data I presented speaks for itself. If you disagree with the analysis 
but hold the position that higher marginal tax rates won't affect small 
businesses, would you agree to exclude small businesses from the 17- to 
33-percent marginal rate increases that are being offered? I await your 
answer.
  I yield the floor, and I suggest the absence of a quorum.
  The PRESIDING OFFICER (Mr. Whitehouse). The clerk will call the roll.
  The assistant legislative clerk proceeded to call the roll.
  Mr. LEVIN. Mr. President, I ask unanimous consent that the order for 
the quorum cal1 be rescinded.
  The PRESIDING OFFICER. Without objection, it is so ordered.

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