Tuesday, July 10, 2012

Republicans: Size Doesn’t Matter

Way back in my high school days I participated actively in debating.

One of the fundamental components at the start of a debate was for the first speaker to define the key terms of the debate. Unless challenged, this guaranteed that all participants were talking about the same thing.

Unfortunately that practice doesn’t apply to political campaigning. 

Perhaps the consequences of this are of no greater impact than in the debate about the impact of tax policies on small business.

I believe that when the average citizen thinks of a small business the local market or machine shop comes to mind. In general they view a small business as conforming to the definitions used by the Small Business Administration.

Following is a list of the most common size standards used by the SBA to determining whether or not a business is small.

·         500 or fewer employees for most manufacturing and mining industries (a few industries permit up to 750, 1000 or 1,500 employees)

·         100 or fewer employees for all wholesale trade industries

·         $6 million per year in sales receipts for most retail and service industries (with some exceptions)

·         $27.5 million per year in sales receipts for most general & heavy construction industries

·         $11.5 million per year in sales receipts for all special trade contractors

·         $0.5 million per year in sales receipts for most agricultural, forestry and fishing industries

This also, by and large, is the framework in which Democrats frame the discussion and the basis upon which they derive their numbers about the impact of taxes on small business.

Republicans, on the other hand, adopt a different definition of a small business. They adopt the definition of a small business used by the Internal Revenue Service.

In simple terms, the IRS identifies as a small business those that meet one of the following criteria:

·         Sole proprietorships
·         Partnerships (general and limited)
·         CORPORATIONS (C and S)
·         Limited liability companies

Such a definition (also termed pass-throughs)  has no consideration of the size of the business. It merely considers the legal structure of the business.

As a result of this approach, the following is an example the kind of businesses that Republicans count as small businesses when developing their estimates of the impact of tax policies:

These are only the top ten on the list. I doubt that many Americans would consider any of these “small” businesses.

It is this difference in the definition of a small business that leads to the disparity in the numbers used by Democrats and Republicans when touting the impact of various tax proposals on small business.

As the Wall Street Journal reported on January 10, 2012 in an article titled More Firms Enjoy Tax-Free Status:

Many large pass-throughs are private, and few details have emerged about their tax status. Construction giant Bechtel Group, for instance, has become a frequent target for congressional critics who say it is inappropriately taking advantage of pass-through rules designed for smaller companies. The company declines to comment on how it is organized for tax purposes….
KKR, the big private-equity concern, reported that it earned a total of about $1.3 billion in 2010 through its pass-through ownership structure. KKR paid about $74 million in corporate tax, largely through a taxable subsidiary. If KKR were instead organized as a single taxable corporation, it would have paid about $523 million in corporate tax, counting both federal and state taxes, the company said. That means its pass-through structure saved it about $449 million.
Some but not all of that tax savings disappears when the individual taxes paid by the owners also are considered. Even so, KKR's current pass-through structure saves at least $277 million in taxes overall, compared to a taxable corporate structure, when all taxes are considered….
By some estimates, more than 60% of U.S. businesses with profits of $1 million are structured as pass-throughs, the highest rate among developed countries. Their popularity is one big reason why federal corporate tax collections amounted to just 1.3% of GDP in 2010, well below their mark of 2.7% in 2006 and far beneath their peak of 6.1% in 1952.

Next time you hear Democrats and Republicans disagree about policy impacts on small business, whether taxes or anything else, it would be worthwhile to keep this distinction in mind. It would also be worthwhile to consider which definition you consider more misleading.


  1. I don't know who to vote for, Ken. The stuff they are talking about (and campaigning on) suits them both, because they are both policy wonks. Neither one of them has "that vision thing." They both appear to be deep down dull.

    At this point I am sticking with my earlier contention that the only thing in the past year that has even approached sexy was when the POTUS sang a few bars of Marvin Gaye, sort of impromptu, and proved he was a human. It might seem shallow to you, but right now that is why he gets my vote. Romney better make himself likeable to me otherwise he is a goner, as far as my vote goes. Mitt, if you could just learn how to do the Electric Slide, or the Moonwalk, or something. Can you sing Sinatra?

    Please, I just want one of them to step up and be special, and take this election.

    This campaign should be more "American Idol" and less wonkerisms about tax credits to small business, and who loves them more the Repubs or the Dems.

    Thanks Ken for letting me vent. In return I will try to hate the Repubs because they are distorting definitions in order to make their argument. No, I take that back. I will acknowledge that the Repubs are distorting definitions in order to bolster their side of the story. Okay, I can live with that.

    Have a nice day.

    1. Peeps dont waste your vote your as brainwashed as Ken, The song obama is singing sucks.Try going to a shrink that is an independent maybe he has a song you can connect with

    2. It's so rewarding attempting to debate with those whose only response to facts, data and reason is invective.

    3. Nov.24,2013... I believe we are now seeing the result of Obama's singing. It is a sad time in this country when people who are ill informed vote. The mess that Obama has been allowed to create by the lack of vetting him..

  2. Where Are Mom and Pop?

    Where are Mom and Pop now that we need them?

    When President Ronald Reagan in a nationwide address called on Americans to support a three-year tax cut be emphasized the importance of small, family owned businesses to the nation's economic health.

    Reagan said 80 percent of the country's workers are dependent on businesses of less than 150 employees. He called for an increase in the initial amount exempted from inheritance taxes in order to preserve the so-called "Mom and Pop" stores, shops, and farms.

    These changes are necessary, says Reagan, to allow independent businesses a better chance to remain in the family after the owner's death.

    In the last few decades, small enterprises had to be sold - generally to retail chains or big corporations - simply to raise enough money to satisfy the tax collector.

    What Mr. Reagan left out of his speech was the extent of the small business catastrophe already upon us. More than a half million small businesses failed last year, and twice this number changed hands.

    "We have not done away with the Mom and Pop stores. We have only done away with Mom and Pop."

    "Standing where their store once was is a plastic replica - the mass-produced and centrally located convenience store."

    "These imitations do not sell food more cheaply than the originally. In fact, their prices are frequently higher than those in the few remaining independent neighborhood grocery stores."

    Latona maintains that Mom and Pop stores, family farms, independent processors and local restaurants can feed the public better than the food industry giants.

    It is no coincidence that the number of permanently unemployed citizens in this nation has grown in exact proportion to the decline of small businesses.

    Congress is quick to impose steep inheritance taxes, proportionately higher income taxes and minimum wage hikes on small businesses.

    The giant corporations never pay inheritance taxes, stop paying income taxes after 48 percent and pass along union-negotiated wage increases easily to consumers.

    There are nearly 13 million small businesses throughout the country earning less than $50,000.00 per year. They provide a living for four-fifths of the work force.

    If only half these were each able to hire one more employee, unemployment would be wiped out!

    An enlightened consideration of the problems of small businesses would do more for the U.S. economy than a dozen balanced budgets and twelve tax cuts.

    And best of all, Mom and Pop would do the job without cost to the taxpayers or without by a huge, bumbling bureaucracy.

    Author: Lindsey Williams
    Excerpts from Article Dated: July 30, 1981

    1. I would debate your points on the simple fact that what was in 1981, is no longer in 2012. Whatever the landscape was 30 years ago, it is not the same now. Plus, your choice to quote Reagan is suspicious to me because right-wing Republicans tout the achievements of Ronald Reagan like he's Jesus f******g Christ. Ronald Reagan was an actor, pretending to be president while selfish corporate fat-cats gutted the American dream for profits. Southbridge is a case-in-point for corporate greed. Look at the AO. It is privately owned and operated and still claims a mailing address—and manufacturing—in Southbridge. Just search for them on Google. The circumstances under which Ao operates are suspicious at best—and legal. Is it really a surprise coincidence that the AO—a military industrial complex corporation—moves its major manufacturing operations to Mexico within the same era that unions took major blows to political and business influence?

    2. FYI - Reagan was a former democrat.

      Once again, the Federal Gift and Estate Tax (e.i.) “The Tax Relief, Unemployment Insurance Re-authorization, and Job Creation Act of 2012" which brought us a $5.120 Million lifetime gift and estate tax exemption, a maximum tax rate of 35%, and portability of exemptions between spouses are all set to expire after December 31, 2012.

      Unless new legislation is passed, on January 1, 2013, the lifetime gift and estate tax exemption drops to $1 million, the top gift and estate tax rate increases to 55%, and portability expires.

      “Mom & Pop” shops are representative of the smallest of the “Small Businesses”. These type of businesses, upon the death of
      either “Mom/Pop”, generally become part of an individual’s estate.

      In today's world; reaching an estate threshold of $1 Million Dollars is relatively not that difficult. Best "Mom/Pop" or their kiddies have plenty of money hanging around just in case.

      What happens next will likely depend on the political landscape after the coming election.

      Watch the Debate: Is the Death Tax Fair - Thu, December, 09, 2010


    3. Jester, a million in assets isn't hard? Who are you kidding? I think you should try saying that on Cross Street.

      I'm skeptical of your opinion that small businesses become estates or gifts generally. I cannot prove that one way or another, but that logic sounds like it has holes.

    4. @ iq

      Here's the Legal definition of a Mom-and-Pop Shop:

      “A type of enterprise that is independently owned and operated, has few employees, does a small amount of business, and is not predominant in its area of operation”.

      To name a few...think in terms of a family owned & operated Jewelry Store, Liquor Store, Restaurant, Gas Station, Repair Shop, General Merchandise Store, Pizzeria...

      So what’s someone worth if they happen to own such a business, a house, vacation property, rental property, savings, and possibly stock/bonds???


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