Identifying real small-business owners

Remember the big fight late last year over extending the Bush tax cuts on the wealthiest Americans.  Those wanting to keep the cuts argued that small business owners would be hurt because many or most of them had individual taxable incomes of over $200,000 or joint incomes of over $250,000.  Tax these people more and they’ll stop creating jobs.

Those of us who argued that very few (possibly only 2 or 3 percent) of real small business owners made that kind of income pointed out that the federal government needed the additional revenue either to fund job-creation or reduce the deficit.  I described the vast majority of upper income folks who Bush tax cut supporters claimed were small business people this way:

Very few of them are what most would consider small business owners. They include partners in large corporate law firms, hedge fund managers, K Street lobbyists, high-powered consultants, Wall Street bond traders and the country's wealthiest millionaires -- all of whom claim some business income and thus are counted in IRS eyes as small businesses. These aren't "mom and pop" businesses, says Adam Looney, senior fellow at the Brookings Institution.

Now a report from the U.S. Treasury looks to better define exactly who is a small business person.

According a story in The Hill today by Bernie Becker, under the usual criteria anybody who reports pass-through income on their personal taxes was considered a small business person.   Using this definition in 2007 there were 34.7 million small-business owners.

So how many of these 34.7 million were not really small business-owners as we know them?  To look at that Treasury developed two methods to ferret out the small-business imposters.  One way was to say that more than $10 million in “small business” income or deductions kicks you out of the small business category.  This culled out 14.7 million pretender small-business people—those the proponents of keeping the Bush tax cuts for the wealthy love to claim are just your average Main Street business folks. 

When the Treasury defined a real small-business person as one who claims at least 25 percent of their adjusted gross income from a small business, only 12.9 million taxpayers remained. 

The fight over keeping the Bush tax cuts (set to expire at the end of next year) for the top two income brackets will start again with the new Congressional “Supercommittee” that is to address deficit reduction.  These new Treasury definitions and data will hopefully dispel the bogus arguments for keeping them.