Just how many small business owners are in that top tax bracket?

The media keeps citing an old statistic claiming that 97 percent of small business owners don't fall into either of the top two tax rates. Is that number based on faulty logic?

Scott J. Ferrell / Congressional Quarterly / File
Kevin A. Hassett, left, director of Economic Policy Studies at The American Enterprise Institute talks with colleagues Lawrence Mishel, Mark Zandi, and Andy Stern before the House Financial Services hearing on employment growth in Washington, D.C. on Feb. 23. Dr. Hassett recently co-authored an article arguing that the '97 percent' statistic is faulty.

In 2004, William Gale penned a one-page piece for TaxNotes arguing, "Roughly 97 percent of small businesses would not be affected at all by increases in the top two tax rates."

That line has been repeated frequently in light of the upcoming expiration of high-bracket tax cuts.

Kevin Hassett and Alan Viard in today's WSJ counter the logic, essentially correcting Gale's overinterpretation. It may be true that 97 of tax returns with small biz income are not in the top tax brackets, but that is not the same as 97 percent of small businesses. Gale should know better.

The 3% figure, which is computed from IRS data, is based on simply counting the number of returns with any pass-through business income. So, if somebody makes a little money selling products on eBay and reports that income on Schedule C of their tax return, they are counted as a small business. The fact that there are millions of people in the lower tax brackets with small amounts of business income may be interesting for some purposes, but it is irrelevant for the assessment of the economic impact of the tax hikes.

The numbers are clear. According to IRS data, fully 48% of the net income of sole proprietorships, partnerships, and S corporations reported on tax returns went to households with incomes above $200,000 in 2007.

This shouldn't be a political issue, but too many folks are in denial that high income taxes on the "rich" are big burdens on entrepreneurs.

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