Small businesses, like the family-owned diner and the Main Street hardware store, are iconic images of America’s entrepreneurial spirit. Now, as President Obama and lawmakers seek to negotiate a deal on taxes and federal spending to avert a year-end budget crisis, both political parties and a range of outside advocates are claiming they best represent the interests of small business.
But politicians and interest groups have twisted the definition of “small business” as they seek an advantage in the debate over whose taxes to raise. Those who claim to speak for small business often represent only a narrow slice of that broad sector, if they represent it at all. And groups that are truly composed of small firms often are allied with advocates on the political right or left whose interests bear little resemblance to those of mom-and-pop stores.
At the heart of the debate is whether tax rates should increase for top-end taxpayers, as Obama has long urged. Most small businesses pay taxes according to individual rates, not corporate rates, so some firms would see their taxes increase if upper-end rates are raised.
“Raising tax rates will hurt small businesses at a time when we’re expecting small businesses to be the engine of job creation in America,” House Speaker John A. Boehner (R-Ohio) said at a Capitol Hill news conference last week. Boehner, who has resisted Obama’s demand for higher taxes on the wealthy, warned that increasing the rates on income over $250,000 would mean higher taxes on business owners representing more than half the country’s small-business income.
But the figure he cites comes from a report by Congress’s Joint Committee on Taxation, which counts many businesses that aren’t actually that small, including big law firms, large companies, hedge funds and private equity firms.
That’s because small businesses aren’t the only firms subject to individual rather than corporate tax rates. Some large and publicly held firms — partnerships, “S” corporations and other “pass-through” entities that collect and distribute income and losses to their owners — also pay taxes at individual rates and would benefit if the top-end tax rates remain low.
Examples are the private equity firms Carlyle Group and KKR, the giant accounting firm PricewaterhouseCoopers and newspaper publisher Tribune Corp.
Obama has countered that small businesses would be better off under his plan to extend lower tax rates for the middle class while allowing rates to rise on income over $250,000 a year.
“I sat down with some small business owners who stressed this point,” Obama said at the White House late last month. If Congress adopted his plan, he said, “families and small businesses would, therefore, be able to enjoy some peace of mind heading into Christmas and heading into the New Year.”
The president has repeatedly said that 97 percent of all small businesses wouldn’t see their income taxes go up at all under his plan. But that figure, which comes from the same report by the Joint Committee on Taxation, relies on one of the broadest possible definitions of a “business,” including workers who are paid as consultants or make small amounts of money from a hobby.
A separate study by the Treasury Department uses a narrower definition of small business — outfits that record no more than $10 million a year in profits and deductions — and reaches a conclusion between the Boehner and Obama extremes. That study found that raising tax rates for the top two income brackets, as Obama has urged, would affect 10 percent of small businesses owners that have employees. These represent 38 percent of income for such small businesses.
The main trade group representing small business, the National Federation of Independent Business, has been one of the strongest opponents of higher taxes on the rich.
“In the small-business sector it’s still not boom times,” said Dan Danner, chief executive of the NFIB. “We generally don’t think recession or close to recession is a good time to be raising taxes on anyone.”
The NFIB is by far the largest trade group for small business. But with only 350,000 members, it accounts for only a very small fraction of such firms, which number at least 4 million and perhaps many more, depending on what’s defined as a small business.
The NFIB has aligned itself tightly with the Republican Party and the conservative movement. The group spent $4.7 million helping Republican candidates in the past election cycle, more than 99 percent of its political spending, according to the nonpartisan Center for Responsive Politics. In 2010, the NFIB accepted $3.7 million from one of the largest conservative interest groups, Crossroads GPS, which was co-founded by Karl Rove, a senior adviser to President George W. Bush.