One of the central controversies in last winter’s fiscal cliff debate concerned the effect raising individual tax rates would have on small business owners.

Critics of the plan to eliminate the Bush-era tax cuts for high income earners argued that because many small businesses are structured as pass-through entities, their owners pay taxes as part of their personal taxes.  Higher individual tax rates would therefore slap some of the nation’s most successful entrepreneurs with a 39.6% top tax rate – higher than the already bloated 35% corporate rate.

That argument fell flat.  A report by Congress’ bi-partisan Joint Congressional Committee on Taxation revealed that less than 3% of small businesses paid taxes at the top levels; the Center on Budget and Policy Priorities estimated it was closer to 1.5%.

In the end, the American Taxpayer Relief Act of 2012 passed and tax rates on incomes over the $400,000/$450,000 threshold rose from 35% to its pre-2001 level of 39.6%.

Now that President Obama is on the campaign for corporate tax reform, some small business leaders are trying to rehash arguments from the fiscal cliff negotiations over the individual rates.

The Weekly Standard, a conservative blog, posted an article saying Obama thinks the “top tax rate should be 28% for Corporations, 40% for small businesses.”

And as the WP reports: “The president’s goal to consider only corporate tax reform leaves out small businesses, our nation’s most robust job creators,” Rep. Sam Graves, chairman of the House Small Business Committee, wrote in an e-mail, arguing that most small employers “don’t stand to benefit under the president’s plan.”

For the few small business owners who day pay income rather than profit taxes, they do have cause to be disenfranchised with the President’s focus on corporate tax reform.  The package unveiled last week – to drop the top corporate tax rate to 28% (and 25% for manufacturers) while eliminating loopholes and reigning in some foreign tax avoidance – does not explicitly address small businesses.

John Arensmeyer, president of Small Business Majority, a small business lobbying group, sees it differently: even at 28%, only a small fraction of small businesses would be paying higher rates than corporations, he said in an interview with the WP.

Arensmeyer also believes the President’s proposal has a lot that his 6 million small employer members can get behind.  From an ethics perspective, the plan would cut foreign tax loopholes and frivolous deductions, which are exploited far more regularly by large corporations than small businesses.

From a financial perspective, Obama called for a simpler tax filing process and to increase the amount of equipment investments employers can write off – saving small businesses time and money.

Most importantly, Arsenmeyer argues, are the infrastructure and job-creation projects included in the package.  His group’s polling showed that weak consumer demand is holding back business more than high taxes.  “More jobs and more money in the hands of middle class consumers means more money that can be spend by products and services from small business,” Arensmeyer said.

To clarify, the White House proposal should not be described as a tax cut.  While the top corporate rate would come down, the base-broadening proposals more then compensate for the lost revenue.

Tell us what you think about the President’s plan for corporate tax reform in the comments section below!

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