In last night’s debate, Romney said:
But let’s get to the bottom line. That is, I want to bring down rates. I want to bring down the rates down, at the same time lower deductions and exemptions and credits and so forth so we keep getting the revenue we need.
And you think, well, then why lower the rates? And the reason is because small business pays that individual rate. Fifty-four percent of America’s workers work in businesses that are taxed not at the corporate tax rate but at the individual tax rate. And if we lower that rate, they will be able to hire more people.
It is clear from the context that Romney is generally referring to limited liability companies (“LLCs”), partnerships, and subchapter S corporations as “small businesses.” But it is absolutely not true that they pay taxes at the individual rate, because none of these entities normally pays income taxes. Instead, their earnings are passed through to their owners, and their owners pay income taxes on those earnings.
This is a simple misrepresentation of the tax system, and Romney certainly knows better (most of the Bain entities that he has invested in are partnerships, for example). So why is Romney lying about this?
The answer is that he is trying to set up a category of taxpayers—“small businesses”—to which he can deliver a tax cut that will overwhelmingly favor the wealthy, while claiming that he is not cutting taxes of the wealthy.