Expect More Small Biz-Washing as Election Day Nears

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We need a term for the practice of using small business as cover to justify a policy that mainly benefits something else. Maybe call it “small biz-washing.” Small businesses, beloved by politicians left and right, are routinely described as some critical piece of the economy’s anatomy, usually “lifeblood” or “backbone.” In an election year, especially with the weak economy center stage, expect to find them frequently showing up in talking points to justify all sorts of policies that are, in fact, about something other than small business.

The latest example: another claim that letting the Bush tax cuts for the wealthiest filers expire will “hurt small-business job creators in particular.” The justification for this is a new report (PDF) from Ernst & Young, commissioned by a handful of business groups that include the National Federation of Independent Business and the U.S. Chamber of Commerce. E&Y’s economic model says that higher income taxes on households making more than $250,000 a year would, in the “long-run,” shave 1.3 percent off gross domestic product and mean 700,000 fewer jobs. By when? The report, somewhat cryptically, says that “two-third to three-quarters of the long-run effect is reached within a decade.”

The paper itself says very little about small businesses. In fact, it doesn’t use the phrase “small business” at all (though the accompanying press releases have it in the headlines). What E&Y is talking about here are “flow-through” businesses—including partnerships, LLCs, sole proprietorships, and S-corps—that don’t pay corporate taxes. Instead, their profits flow through to the owners’ income and are taxed at their personal rates.

That group includes most small businesses, for sure. It also includes quite a few large businesses, particularly in industries such as law, accounting, private equity, and other financial or professional businesses frequently organized as partnerships. Some 17 percent of such flow-through companies had more than 500 employees, according to an earlier E&Y report (PDF).

That includes “some very large companies that you might think are paying corporate taxes,” says Martin Sullivan, chief economist at the nonprofit publisher Tax Analysts who worked in the Treasury Department during the George H.W. Bush administration.

Last year, the Treasury Department attempted to gauge how many small business owners fall into the top two tax brackets. Its analysis (PDF) focuses on taxpayers with less than $10 million in yearly business income and those who get at least a quarter of their earnings from their businesses, not from other sources. Under that definition, just 29 percent of small business income belongs to people in the top two tax brackets.

Most of the benefits from the lower tax rates go to other high-earners. By Sullivan’s analysis (PDF), only 8 percent of the income affected by the changing the top tax brackets goes to small employers; 70 percent goes to wealthy taxpayers who are not business owners. “The biggest chunk is going to people who have nothing to do with this direct small business job creation,” he says. “Small business job creators, to the extent they exist, are being used as poster children for a tax cut that affects a much broader population.”

Putting aside the politics, lowering taxes for employers across the board may help create jobs, Sullivan says. “There’s certainly a case to be made that if we want to create jobs, we should lower taxes on all businesses,” he says. “There is no reason to put special emphasis on small businesses for job creation,” other than what he calls the “bipartisan mythology” that they drive job growth.

(Of course, the right certainly doesn’t have a monopoly on small biz-washing. In a recent White House blog post, health adviser Jeanne Lambrew touts the Affordable Care Act as a boon to small employers and writes that “they’ll still be able to choose how much of their employees’ insurance costs they want to cover.” That’s not the case for any employer with 50 or more workers. Those companies still have big concerns about the law and their new mandate to cover employees or pay a penalty.)

Small biz-washing isn’t going away, especially in an election year. Says Sullivan: “Everybody wants to wrap their program in the cloak of small business.”

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