Small Businesses? Debate Intentionally Skews Reality, Critics Say

Some 99% of people filing as "small business owners" do not make enough money to qualify for the part of Bush's tax cuts that Kerry aims to repeal. But among those who do, many are not real entreprenuers.

Author: Madeleine Baran

Published: October 24, 2004

One of the odder moments in the second presidential debate occurred when Senator John Kerry noted that his opponent technically owns a timber company, leading President George W. Bush to nervously quip, "I own a timber company? That's news to me. Need some wood?"

Although the exchange likely confused some viewers, Kerry was hinting at an ongoing controversy over the administration's definition of "small business owner." While Bush often mentions small business owners who have been helped by his tax cuts in his campaign speeches, critics say the claims are deceptive and distract voters from the huge cuts given to the rich.

Under the Treasury Department definition adopted by the Bush administration, the "small business owner" category includes anyone who earns as little as $1 from a sole proprietorship, a partnership, or a corporation with fewer than 75 stockholders. Among those who qualify are executives who sit on corporate boards; journalists and others who accept speaking fees; individuals, like Lynne Cheney, who receive income from consulting work; and even the president, who owns a small stake in the Lone Star Trust, an oil and gas company. When these individuals file taxes, they are classified as small business owners, even if they have no employees or direct involvement in any particular business.

"When people think about small business owners, they think about mom and pop starting a grocery store or a restaurant," said Len Burman, co-director of the Urban Institute-Brookings Institution Tax Policy Center. Adding that, because of freelance consulting work, he also qualifies as a small business owner under the Treasury Department definition, he noted, "We're not entrepreneurs. We're not creating jobs."

Many of these "small business owners" did benefit from the Bush tax cuts, which lowered the highest individual income tax rate, saving those earning over $1 million about $136,398 on average. In comparison, the bottom 20 percent of income earners received just $19 and the middle 20 percent received $652, according to the Tax Policy Center.

However, a study by the Tax Policy Center found that 99 percent of the 32.8 million people who file taxes as small business owners do not earn enough to qualify for the top rate reduction. The one percent of small business owners who do qualify earned $1.5 million on average in 2004. Critics say this data shows that the cuts benefit the wealthy, instead of the 62 percent of small business owners who earn under $75,000 a year.

"Our biggest gripe in the way the administration presents this is that they take what's basically a true statement, that people who pay at the top rate have small business income -- but unless its clarified, people come away from that thinking most small businesses are at the top rate," said Joel Friedman, senior fellow at the Center on Budget and Policy Priorities, a progressive research organization that has tracked the controversy closely.

The White House alleges Kerry would increase taxes for many small business owners. In a Bush campaign ad released in September, an announcer says that the administration's tax cuts will "create jobs so small businesses can expand and hire." In contrast, the ad says Kerry's plan will force 900,000 small business owners to "pay higher tax rates than most multinational corporations."

Although the ad seems to imply that Kerry would increase taxes specifically on small businesses, Kerry has announced no such program. The Bush campaign's charges are based on Kerry's stated desire to repeal the tax cuts for those making over $200,000 a year. A small number of these individuals are also technically small business owners and would see their tax roll back to pre-tax cut levels.

An analysis by the Tax Policy Center found the number of affected small business owners to be about half of the 900,000 Bush claims. In a report commenting on the analysis, the Center on Budget and Policy Priorities notes that, even if 900,000 people were affected, it would still be a tiny portion of the 32.8 million people who file taxes as small business owners.

Some analysts say the controversy distracts from larger questions about how to revive the troubled economy. "By and large, businesses make their decisions using more factors than just changes in tax rates, including whether or not the future economic environment looks good enough to invest in more capital or more labor," Friedman, the Center on Budget and Policy Priorities fellow, said. "If the future looks rocky, he said, tax cuts would not be enough to inspire businesses to hire more workers and increase investments.

As the election season draws to a close, both candidates continue to frequently mention their support for small businesses, while much of the public seems unaware of the difference between the two campaigns' definitions. Burman said that, in the end, other issues, like government-subsidized health care, could help small businesses far more than any tax cut, making the debate over semantics, "in some sense, a silly question, anyway."