RNC Ads Debunked

This fairy tale was re-told most recently by Republican National Chairman Ed Gillespie when he said in a Dec. 3 speech: “80% of the tax relief for upper income filers goes to small businesses.” It’s untrue – and a classic example of a statistical distortion gone amok.

It may be true that 79% of upper-income taxpayers have some income from business, but Gillespie’s definition of “small” business actually includes big accounting firms, law firms and real-estate partnerships, and “businesses” that are really only sidelines – such as occasional rental income from a corporate chief’s ski condo. In fact, tax statistics show that upper-income taxpayers get far more of their income from salaries, capital gains, stock dividends and interest than they do from small business.

By twisting statistics and over-hyping, Republicans are spoiling for themselves what would otherwise be a perfectly serviceable argument: lowering taxes on the most affluent Americans does indeed lower taxes on many small businesses, and thus creates more jobs. But not nearly as many as Gillespie and some other Republicans are claiming.

It is undisputed that that many small-business owners report profits from their companies on their personal income-tax returns and not on corporate returns. It’s also true that small business is a major source of new jobs, and economists generally agree that lower business taxes eventually tend to produce more hiring. So cutting the top tax rate probably does stimulate some small-business hiring. But how much? Nothing close to 80%, it turns out.

Where Top Taxpayers Get Their Income
(Average share of income from different sources to those paying the highest tax rate of 35% in 2003)
Wages & Salaries	47.1%
Interest, Dividends, Capital Gains	25.8%
Business	22.2%
Other (Pensions, Alimony, etc.)	4.9%
Source: Tax Policy Center Table 16: Composition of AGI by Tax Bracket, 2003

The 80% claim originated last May with a report by the Republican staff of the Joint Economic Committee of Congress, where it was prepared as ammunition for the debate over the second Bush tax-cut bill which eventually became law later in 2003.

That report concluded that 79% of the highest-income Americans have some business income. Then the report made a huge leap, claiming “These small business owners would receive 79 percent of the … tax savings” from cutting the top tax rate. But wait a second – very few of those “small business owners” are really running dry-cleaning stores. A Republican committee staff member confirmed to FactCheck.org that their report is counting anybody who made even one dollar of profit from a hobby business as a “small business owner” if they reported that income on Schedule C of their federal income-tax returns.

Their method also counts as a "small business owner" any member of an investment club -- someone who put $50 a month into a pool to buy stocks with friends and then reported a few dollars of dividends and capital gains on a K-1 form from the partnership at the end of the year.

And that’s not all. Also counted as “small business owners” would be:

--A corporate executive who made $500,000 in salary and bonuses, and who also had $3,000 in income from renting out his yacht.

--A TV anchorwoman making $1 million in salary and reporting $25,000 in speaking fees as Schedule C income.

--A partner in a national accounting firm who has no side business at all, but who gets a big chunk of his income as a share of the giant partnership’s profits.

It’s silly to call any of these “small business owners,” but Gillespie went even beyond what the report said. He said 80% of the tax relief went to “small businesses ,” (as opposed to “owners”). Not even the Republican staff report can back that statement.

So how much of the benefit really goes to small business? According to an analysis by the nonpartisan Tax Policy Center, done at the request of FactCheck.org, business income accounts for just over 22% of the income that will be reported this year by the most affluent American households. Those upper-income taxpayers actually get more from interest, dividends and capital gains than they get from business income, but Gillespie said nothing of the tax benefits on that score.

Both the Republican study and the Tax Policy Center focused on the same group of elite taxpayers -- those paying the top income-tax rate. (That's the rate which dropped to 35% this year from the previous level of 38.6% under the most recent tax cut.) In an earlier look at the same group, the Tax Policy Center found that roughly three out of four taxpayers paying the top rate got less than half their income from business. That’s a fact that some Republicans continue to ignore as they spin their small-business fable.

“How the Top Individual Income Tax Rate Affects Small Businesses” Republican Senate staff, Joint Economic Committee, US Congress 6 May 2003.

Ed Gillespie, Chairman, Republican National Committee “Remarks Prepared for Delivery: St. Anselm College, Manchester, NH ” 3 Dec 2003.

Table 16: "Composition of AGI by Tax Bracket, 2003" Tax Policy Center (Washington DC) 18 Dec. 2003.

Table 7: "Distribution of Returns With Small Business Income, 2003", published in: Leonard E Burman, William Gale & Peter Orszag “Tax Break: Thinking Through the Tax Options” Tax Analysts 19 May 2003: 1092.

In September the Census Bureau issued its annual figures on income and poverty, and to nobody's surprise poverty rose and U.S. median income went down in 2002 as a result of the economic downturn. Furthermore, Census said that its official measure of after-tax income also went down by nearly a full percentage point, despite lowered federal income-tax rates.

On the same day, however, the Republican staff of the Joint Economic Committee issued a news release claiming that after-tax income went up - and citing Census figures. What the release did not say is that the numbers being quoted were not the official Census measure of after-tax income, but an obscure, unpublished "experimental" measure that (among other things) does not take account of income from capital gains. The JEC Republicans had even issued a different release earlier in the day, saying that after-tax income was down, and laying blame on the Clinton administration.

There was little comfort for Republican political hopes in the income and poverty figures released by the Census Bureau on September 26. They showed that 1.7 million more Americans fell into poverty in 2002, while income of the typical household declined by $500. And while tax cuts had clearly eased the pain some, for the typical household it was not enough -- even after-tax income declined by $310.

But that did not stop House Republicans on the Joint Economic Committee from putting out a news release claiming Census figures showed tax cuts had produced an after-tax income gain of $249. "This is the first increase in after-tax median income since 1999," said the committee's vice chairman, Republican Rep. Jim Saxton of New Jersey. Without the Bush tax cuts, Saxton said, "there is no doubt that middle income households would have suffered reductions in take-home pay in 2002."

Actually, middle income households did suffer reductions in take-home pay by every measure that the Census bureau published. It publishes 16 different measures of before- and after-tax income, some of which attempt to count such things as the value of Medicare or the paper profit from rising home values. All 16 went down in 2002, including definition 1b, the bureau's official measure of money income minus federal, state and local income taxes.

The Republican release was based on an obscure statistic not included in the official publication, "table RD-1", which Census calls "experimental." It is a less comprehensive measure than definition 1b, as it does not attempt to count income from capital gains or losses (actual profits or losses from sale of property such as real estate, stocks or bonds). Since 2002 was a poor year for the stock market, ignoring capital gains and losses gave a more favorable picture than did the official after-tax income measure.

Footnote: Before they dug up the RD-1 statistic, JEC Republicans issued a news release minimizing the decline in median household income and laying blame for it on the Clinton administration. It focused on Census definition 14, an after-tax measure which counts as income such non-money items as the value of school lunches and employer-sponsored health insurance. Even that measure went down $133, but the draft release quotes Saxton as saying this was "essentially unchanged, with the apparent decline falling within the margin of error."

But Saxton later issued a different release claiming an increase when Census officials provided his staff with the unpublished, experimental figures.

Note: This article was modified Dec. 22, 2003 to reflect that Census publishes 17 definitions of income, not 16 as originally stated. All 17 went down.

In a TV ad supporting the President the Republican National Committee went four words too far, not-very-subtly implying that Democrats who have criticized him are something close to traitors. The RNC ad claims that Bush is being attacked “for attacking the terrorists.” But when pressed to back up that claim the RNC provided only quotes from Democrats griping about such things as Bush losing international support for anti-terror efforts, or spending too little on homeland security. None of them said he shouldn’t be attacking terrorists.

The RNC’s 30-second ad shows a portion of Bush’s State of the Union address from last January 28. As the President speaks of the possibility of “a day of horror,” words silently appear on screen saying “Some are attacking the President for attacking the terrorists.” And just in case anybody might miss the point, the word “terrorists” turns slowly from black to red.

So who’s complaining about attacking terrorists? Usama Bin Laden, maybe. But the RNC made clear in a backup document released to news media that its ad actually referred to Democratic presidential candidates. “Democrats Attack President For Waging War On Terror,” the press release said. But no Democrats were quoted saying any such thing.

The RNC’s examples included, for example, Richard Gephardt saying last September that “the Bush-Cheney bravado has left us isolated in the world - fracturing 50 years of alliances, calling into question our credibility, squandering the global goodwill that was showered on us after 9/11." And the RNC cited John Kerry saying of Bush in July, “He's not making the world safer, I do not believe this administration is doing the job of protecting Americans.” And the Republican document quotes Howard Dean saying on MSNBC that that Bush spends too little on such things as inspecting cargo containers: “The president talks about homeland security and terrorism, but in fact he hasn't done all that much about it."

The RNCs’ examples included John Edwards ridiculing the Bush administration for suggesting that Americans be prepared to seal themselves up in their homes in case of chemical or biological attack, saying Bush’s “idea of homeland security is plastic wrap and duct tape ..."

And in another example offered by the RNC, Dean was quoted as saying the President’s personal swagger is alienating potential allies and hindering international progress against terror. “It's a personal matter,” Dean is quoted as saying. “He has some part of his personality which leads him to humiliate people who disagree with on policy matters.”

But according to the RNC, even such criticism of the President’s personality constitutes being soft on terrorism. If this ad is a preview of what’s to come in the general election, look for a long, ugly campaign full of distortions.

"RNC Research Briefing: 'Reality'," Republican National Committee, 21 Nov. 2003.