Amid Tax Debate, a Closer Look at Small Businesses Is it only right that wealthy Americans chip in more to help the government meet its obligations? Or does raising taxes on the rich hobble the country's "job creators"? When President Obama proposed this week to let the Bush-era tax cuts expire for high earners, polar-opposite reactions from Republicans and Democrats were as swift as they were consistent. Mitt Romney repeated an argument he makes in almost every stump speech: that a tax increase on upper earners will slow hiring because most Americans work for small businesses, whose owners report earnings on their individual returns. "Fifty-four percent of American workers work in businesses taxed as individuals," Mr. Romney said at a fund-raising event in Montana on Wednesday, repeating a figure he uses often. So when the president wants to raise taxes on individuals - as he's proposed from 35 percent to 40 percent - he kills jobs. Mr. Obama had anticipated this objection when he proposed on Monday to extend middle-class tax breaks beyond 2012, while urging - once again - that rates rise on earned incomes of more than $200,000 for individuals and $250,000 for couples. "Now, we can already anticipate - we know what those who are opposed to letting the high-end tax cuts expire will say," Mr. Obama said at the White House. "They'll say that we can't tax "job creators." " But most small-business owners would be exempt, he said, because "97 percent of small businesses fall under the $250,000 threshold." Republicans, by reframing the issue of taxes on the wealthy into a debate about job creation, have cannily evoked Americans" patriotic support of small businesses as an engine of economic growth. Democratic and Republican politicians are equally given to praising small businesses for creating a majority of jobs. But the world of small businesses - more specifically, of individuals who report business earnings on their tax returns - is complex. Many enterprises do not fit the rosy image of a tech start-up in a garage or a mom-and-pop florist. Mr. Obama is correct that only a tiny sliver of business owners make enough to land in the top tax brackets. The Joint Committee on Taxation, a nonpartisan Congressional office, estimated last month that 3.5 percent of taxpayers with business income in 2013 would fall in the tax brackets that would rise under the president's proposal. But the tax committee also supported Mr. Romney's assertion that this sliver represents a significant share of the economy: those top earners generate 53 percent of all small-business income. Mr. Romney's figure that a majority of Americans, 54 percent, are employed at companies whose owners file taxes as individuals is from a report by the accounting firm Ernst & Young, according to the Romney campaign. The report examined all types of "flow-through" businesses, in which profits pass from the business to the individual owners for tax purposes, including partnerships, sole proprietorships and other entities not subject to corporate taxes. The number and share of the economy of flow-through businesses have steadily grown in recent decades, to the point that many would hardly be considered small businesses. Seventeen percent of workers in flow-through enterprises work at companies with more than 500 workers, according to Ernst & Young. Flow-through businesses include large law partnerships and hedge funds. Before it went public in 1999, Goldman Sachs was a flow-through business. Republicans often argue that the owners of flow-through businesses are sensitive to marginal tax rates in making hiring decisions. "I used to run a small business; I used to have pass-through income," the House speaker, John A. Boehner, said on Tuesday, promising to kill the president's proposal in a vote later this month. I would have been affected by this tax increase that the president's calling for. This is not going to help our economy. But the question of whether small-business owners are encouraged or deterred by marginal tax rates is robustly debated by economists. "If I've got $100 after taxes and you raise my tax rate and it goes down to $80, I might be less likely to go out and hire an additional worker, because I don't have enough cash on hand," said Douglas Holtz-Eakin, a former economic adviser to President George W. Bush. Mr. Holtz-Eakin has done research linking an entrepreneur's lower individual tax rate with a decision to hire more workers. Another expert, William G. Gale, a director of the nonpartisan Tax Policy Center, disputed the notion that raising marginal tax rates on small-business owners depressed hiring. These businesses can deduct wages from their revenues, he said, with the potential to lower their effective tax rate. "They can deduct everything in full," Mr. Gale said. It's a canonical result in economics that if you can immediately deduct the investment, then the effective tax rate should be zero. In any event, recent studies have challenged the notion that small businesses are a key engine of job creation. Older small businesses, it seems, cut more jobs than they create. Research by the economist John C. Haltiwanger and others showed that the only small businesses that create more jobs than they destroy are those less than five years old - in other words, start-ups. "The small-business sector per se is not necessarily a dynamic part of the economy," Mr. Gale said. Reducing taxes on high individual incomes across the board is applying too broad a brush, he said, to stimulate the fraction of small businesses that are young and innovating and generating most new jobs.