Kansas Governor Sam Brownback had championed the largest tax cuts in the state's history, eliminating taxes on non-wage earnings for nearly 200,000 small businesses. Just like all Republicans these days, Brownback had made cutting taxes and shrinking government the centerpieces of his government. Now the great State of Kansas has a huge projected budget shortfall.

IRS Publication 334: Tax Guide For Small Business is a document published by the Internal Revenue Service (IRS) that provides small business¹ owners with information on federal tax law that apply to small businesses. It outlines different tax credits and deductions that are available, and how to treat both business income and expenses — and what to do if a business is sold or dissolved during the year. The publication pertains specifically to small business owners who are self-employed, as well as statutory employees — such as independent contractors².

1. S Corporations, partnerships, farmers and fishermen, corporations, residential rental property income and income from passive activities are NOT covered under this IRS publication.
2. Business owners must correctly determine whether the individuals providing services are employees or independent contractors.

Generally, business owners must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. They do not generally have to withhold or pay any taxes on payments to independent contractors. That's why many businesses have been shifting towards using independent contractors, more so than regular employees (to engage in wage theft, a tactic being used by both big businesses and small businesses alike.)

As of 2011, a new definition of what constitutes a "small business" was being considered by the Treasury Department — and it was raising concerns among some closely held companies that would require them to start paying corporate taxes. The proposed definition places the upper limit for a small business at $10 million in annual gross income or deductions. Until that time, there was no size limit on what constitutes a small business for the purpose of tax obligations.

As Bloomberg had reported, taxpayers reporting flow-through income typically have been counted as small business owners, even if they are large companies. Edward Kleinbard, a former staff director of the Joint Committee on Taxation (who is now a law professor at the University of Southern California), had said: “Before this, you had the largest law firms in America, with revenues over $1 billion, and they were being treated as small businesses. That’s just preposterous on its face.”

But Brian Reardon, a lobbyist for S Corporations, had complained (by using an old argument) that flow-through profits that are subjected to corporate taxes would amount to double taxation*, because owners of such companies already pay personal income tax on their earnings. But this personal income he speaks of is usually in the form of "capital gains" (e.g. stock options, etc.), and has a lower tax rate than the "statutory" corporate tax rate (although, not necessarily lower than an "effective" corporate tax rate); and the capital gains tax rate is much lower than the tax rate on regular wages.

*If these businesses don't want to pay any corporate taxes at all, they can always un-incorporate. Working people who have taxes deducted from their paychecks can always claim "double taxation" as well.

The Small Business Tax Cut Act of 2012, sponsored by then-House Majority Leader Eric Cantor (R-Va.), would have slashed taxes on the adjusted gross income of as many as 22 million small businesses — those with fewer than 500 employees — by as much as 20 percent for one year (and would have added billions to the deficit).

At the time, Rep. Pete Sessions (R-Texas) had said, "Congressional Republicans, once again today, will stand with small business across the nation." But he neglected to mention what type of small businesses they're standing for (e.g. hedge funds, private equity firms, etc.) Democrats complained that the GOP bill would have provided tax breaks whether companies hire additional employees or not, including to firms that fire workers. They said its beneficiaries would also include lobbyists, lawyers and pornography businesses.

Many people still think the U.S. Chamber of Commerce is a government agency, such as the Department of Commerce or the Small Business Administration. But it's not. Just like the Business Roundtable, it's really a lobbying firm that mostly represents the interests of BIG businesses — and they are paid millions of dollars by large corporations, much like the CEOs on Wall Street.

Fox News and the Republicans like to argue that 96% of the U.S. Chamber of Commerce's members are small business owners; but what they also deliberately fail to mention is that only 11% of all small American businesses actually belongs to the U.S. Chamber of Commerce (and are usually hedge funds, private equity firms, etc.)

Under Obama's originally proposed "Millionaire Tax Plan", (which the GOP said, small businesses were against), John McCain once claimed that 23 million small-business owners would pay higher tax rates. He was wrong. The vast majority would have seen no change, and many would have even realized a tax cut.

Small businesses (ones that actually hire people) in the U.S. create most of our jobs. According to the Census Bureau, the vast majority of small businesses have 9 employees or less. In 2008 there were 27,757,676 total firms. 

• Of these, only 21.8% have any employees at all.
• Of the firms that have employees, 78.8% have 9 employees or less.
• Of the 6,049,655 employer firms as of 2007, 61.2% had sales receipts of $999,999 or less (so the owners can't pay themselves a million-dollar salary and be taxed under Obama's plan.)

Obama’s originally proposed tax plan (aka The Buffett Rule) would have created a 30 percent tax on individuals making more than a million dollars a year — and it wouldn’t have fallen on all employers — only on those with PERSONAL INCOMES over $1 million. Taxes will go up only if small-business owners have capital gains or dividends; but Obama’s proposal would not have increased tax rates on capital gains or dividends for couples making under $250,000 a year — or on singles making under about $200,000 (regardless of whether they are classified as small-business owners or not).

And of the 26.8 million firms that the Small Business Administration counts as "small businesses," fewer than 6 million are actually "employer firms" with any payroll at all. From this, we must conclude that to arrive at McCain's previous 23 million figure, he and the Republicans are counting mostly "business owners" with no workers, including those who simply report small amounts of income from sideline or freelance work.

The Republicans had argued that Obama’s tax plan would "destroy jobs," but they were also counting firms that don’t produce any jobs at all. The actual number of business owners who would have been affected by Obama's "millionaire tax" turns out to be well under a million, and the number of employers would have been even less.

However, not even all of those can properly be called "small-business owners" (or "job creators"). Some are farmers. Some are hedge fund and private equality investors. Many are lawyers, accountants or other professionals who get some of their income in the form of partnership distributions. Others may be passive investors in real-estate partnerships or similar investment arrangements — and not really persons who own and manage a business (or hire people).

For all these reasons it was judged that the actual number of small-business employers who would face higher tax rates under Obama is probably far below what the Republicans claim — and certainly a far cry from McCain's ridiculously inflated 23 million figure.

Someone should tell the GOP, "we're not in Kansas anymore" — and that we should start taxing multi-billionaires (and the garden variety millionaires / small business owners like Mitt Romney) more on their capital gains and carried interest to help pay down the deficit, rebuild our infrastructure and to shore up Social Security (rather than cut Social Security) for the very people that made them all so rich.