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:
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.