Fact Check: Obama's tax plan and small businesses

The Statement: In an interview on Fox News' "Hannity & Colmes" on Wednesday, October 8, Republican presidential candidate Sen. John McCain repeated his assertion that Democratic presidential candidate Sen. Barack Obama's tax plan "raises taxes on small business income."

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The Facts: Obama's tax plans, as stated on his Web site and as discussed by various analysts, would increase individual tax rates for the two highest tax brackets to pre-Bush administration levels of 36 percent and 39.6 percent. That would apply to families with income greater than $250,000 or singles with income greater than $200,000, affecting about 2 percent of taxpayers. That tax increase - or repeal of Bush tax cuts, depending upon one's perspective - would affect a portion of small businesses because many small business owners pay their taxes through personal income tax. The Bush tax cuts are scheduled to expire by 2011. Obama has said he would let them run out for people in the top two brackets, while giving new tax cuts to people making less.

But the number of small businesses and owners that would see a tax increase is hard to pin down because the term "small business" can be used to describe anything from an operation with hundreds of employees, to independent business people with no employees except themselves, to businesses that are little more than income-earning hobbies for their owners who also count income from other sources.

"Technically (the McCain assertion) is correct in that taxes would go up for certain categories of small businesses," said Gerald Prante, senior economist with the Tax Foundation, a nonpartisan tax research group based in Washington. "But it really depends on how you define small business. It's like the very rich - it's only a small percentage of people but they have a lot of money. The same is true of the number of small businesses that would be affected by Obama's highest tax rates - it's a small percentage of the total number of small businesses in the United States."

Prante said the Tax Foundation estimates there are 36 million income-generating operations in the United States that can be classified as small businesses, using the foundation's "very generous" definition. Under current laws, the foundation calculates that small businesses pay $1.08 trillion in taxes annually. With Obama's plan, Prante said, the foundation estimates that "less than a few percent" of those small businesses would be above the $200,000 threshold and face a tax increase.

Obama's tax plan would leave the corporate tax rate at 35 percent and, according to Obama's Web site, taxes would remain the same or be reduced for families with less than $250,000 in income, whether that income came from a small business or wages or other sources.

The Verdict: Misleading. While Obama's plan would increase taxes for an undetermined number of small business owners who pay their taxes through personal income tax and whose incomes exceed $200,000, it would not establish across-the-board tax increases for all small businesses.