Treasury Secretary Tim Geithner testified today before the Senate Budget Committee.  Most of the proceedings focused on the Obama tax hike.  Of particular interest was the hemming and hawing Geithner did on the impact that the Obama tax hike will have on small businesses.

Here’s what Geithner had to say in his prepared testimony:

The President’s Budget includes tax provisions to help small businesses. It recognizes that many small businesses are operated as sole proprietorships or through partnerships and other flowthrough entities, and leaves the individual income tax rates at which these small businesses are taxed unchanged in 2009 and 2010. By extending the current rate structure for families earning less than $250,000 after 2010, it ensures that 97% of small businesses will receive additional tax relief at that time or see their rates remain unchanged.

A few thoughts here:

  1. It’s good that Geither recognizes that small businesses are organized as sole proprietorships, partnerships, and S-corporations.  He should further recognize that more than $2 out of every $3 in profit earned by these businesses will be hit by his administration’s tax rate hikes 
  2. It’s good that Geithner acknowledges that small business owners pay taxes on their business’ profits personally.  So, raising tax rates on most of this profit can’t be a good thing, can it?
  3. He claims that 97% of small businesses won’t be affected by these rate hikes.  First of all, that might be a little high (I think the number is closer to 85%), but I won’t quibble over the fact that most small businesses won’t face higher tax rates.  That completely and totally misses the point, though.  Two out of three dollars of small business profits will pay these higher tax rates.  This tax increase is a tax increase on the small business sector
  4. As long as we’re talking numbers, I have another one for Secretary Geithner.  According to the Census Bureau, 35% of American workers–42 million people–are employed in firms with fewer than 100 employees.  These firms are no doubt the same ones that will face a tax hike under Obama

To re-emphasize, the top small business tax rate will go from 37.9% to 42.5%.  If the Obama Democrat primary campaign tax plan goes through (uncapping the Social Security taxable wage base), this rate will further climb to 54.9%.  This would be the highest tax rate on the small business sector since the Carter Administration.

Why does is make sense to focus a tax increase directly on most small business income and the employers of a large percentage of Americans?  The answer is that it doesn’t.