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The Curious Republican Definition of “Small Business”

The typical Republican dodge to make it look like they don’t simply support handing out $100,000 checks to millionaires is that increases on the high-end marginal tax brackets would hurt “small businesses” at a sensitive time for the nation’s economy. I can give you multiple reasons why this just isn’t true.

First off, Democrats and economic analysts agree (and Republicans haven’t to date contested) that the “small businesses” affected represent a small percentage of all small businesses in the country. According to the CBPP, only 1.9% of all tax filers with small business income sit in the top two tax brackets.

Republicans typically respond to this by saying that even this small number of businesses, maybe 750,000 total, represents 50% of all small-business income. Two reasons for that. One, the “small businesses” in that calculation include companies like Bechtel and PriceWaterhouseCoopers, large multinational corporations:

According to the Washington Post, which obtained its information from House Democrats, some of the “small businesses” that could see a small increase in their marginal taxes are household names like accounting giant PricewaterhouseCoopers and Tribune Corp. — privately-owned behemoths whose owners and managers dodge corporate taxes by reporting profits on their income tax returns.

It’s those receipts that allow Republicans to claim, based on a recent report by JCT, that Obama’s plan will ensnare 50 percent of all “small business income. JCT addressed this in the same report. “These figures for net positive business income do not imply that all of the income is from entities that might be considered ‘small.'”

Another substantial part of the “small businesses” included in the Republican calculation are rich individuals who incorporate, who have no or few employees:

(Senate Minority Leader Mitch) McConnell’s numbers only add up if you consider people like billionaire investor George Soros, most movie stars and Obama himself small-business owners, tax experts say.

That’s because the lawmaker is basing his figure on a broad definition of the term that experts say includes authors, actors and athletes who employ few if any workers. It also encompasses businesses that many people wouldn’t consider small, such as Soros’s hedge-fund firm and major law partnerships.

“Every student who is a part-time Web designer, partner in a law firm with a billion dollars of revenue and investor in a hedge fund gets lumped together in the data, along with real small businesses,” said Ed Kleinbard, a former staff director of the congressional Joint Committee on Taxation and now a law professor at the University of Southern California. “We are being over-inclusive in our use of small-business income.” […]

Jane Gravelle, who wrote the research service report, says small businesses with employees will pay 12 percent of the taxes generated by increasing the top marginal rates.

“Across-the-board tax cuts for high-income individuals are not efficiently targeted to small businesses,” Gravelle wrote.

To believe the Republican argument, you would have to believe that Barack Obama or the Koch Brother’s S-corporation, a company created for tax purposes, which typically has no employees, generates the most job creating business activity. Simply put, this dodge falls apart after any amount of scrutiny. But that doesn’t mean that Democrats and the media won’t let them get away with it.

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David Dayen

David Dayen