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November 23, 2012 12:02 PM The Small Business Store-Front

By Ed Kilgore

As observers try to sort out various “compromise” scenarios for both sides in the ongoing fiscal talks, there’s one kind of obvious Republican “fallback” position that probably strikes fear into the hearts of many GOPers: creating a “small business” exemption, or “carve-out,” from higher tax rates.

It’s scary because small businesses have long been the store-front behind which Republicans have protected their intense commitment to lower tax rates for the very wealthiest Americans. Since some small businesses pay taxes as individuals, the “top rate” affects their job-creatin’ mojo immensely, so let’s leave the top rate alone, even if that happens to create a windfall for the richest people on the planet. It’s just a price we all have to pay for the job-creatin’, right?

But now at least one Republican Senator, Susan Collins of Maine, is talking about finding a way to separate very rich individuals from small businesses, either by exempting the latter or imposing a “surtax” on the former, or both, per this report from Politico’s Rachel Bade:

The Maine Republican introduced legislation to extend the payroll cut and several other expiring provisions, and offset it with a 2 percent surtax on millionaires. The surtax included an exemption of sorts for businesses that had less than 500 employees.

This approach is also attractive to some Democrats who want to seem sympathetic to small businesses or “family farms.” And presumably, such a scheme could be structured in a way that can be sold as an emergency deficit-reduction measure rather than as a permanent increase in tax rates.

It’s not as though Collins’ proposal is taking off among Republicans, and even Bade’s bullish article about it discusses it as a “Plan B” if GOPers can’t figure out how to avoid rate increases on anybody. But it certainly represents a challenge to pols who have pretended there is unfortunately just not any way to separate the tax treatment of Daddy Warbucks and that nice immigrant family that owns the corner convenience store.

Ed Kilgore is a contributing writer to the Washington Monthly. He is managing editor for The Democratic Strategist and a senior fellow at the Progressive Policy Institute. Find him on Twitter: @ed_kilgore.

Comments

  • martin on November 23, 2012 12:18 PM:

    Just how did 500 employees get turned into "Small Business". Is that our official gove't definition, or just a number pulled out of the air? 500 employees could make a business the major employer in many small towns. And if they are not clearing $250k a year, they probably are way over extended.

    And, just to use an example from the biz I'm in, many of the giant movie chains incorporate each location as a separate business. Each of those theatres would have under 500 employees and therefore be considered a small business, even though it is just a legal fiction created by a giant corporation.

    Just tax em, dammit.

  • berttheclock on November 23, 2012 12:44 PM:

    I will believe the Republicans truly care about small business, the day, they sponsor a bill creating Single Payer which would take the onus of providing health care away for employers.

  • c u n d gulag on November 23, 2012 12:47 PM:

    My favorite, is when they include hedge fund companies, as small busnisses.

    Yeah, Mitt, that Bain was some small company you started up!
    With 30+ million dollars from South and Central American, Junta-supporting business associates.

    And 500 people AIN'T no "Small Business!"
    I don't know what the definition of "Small Business is - I just know that 500 employess isn't where I'd seperating "Small" from "Big."

    Having said that, I'd be for that. It will take one more talking point and meme away from the Republicans.

  • Tracy Hall on November 23, 2012 1:52 PM:

    The most flagrant abusers of the "small business" moniker are the lawyers and hedge-fund managers who incorporate (LLC or S-Corp) with ***ONE EMPLOYEE*** making $25MM++ - exactly whom Ms Collins would exempt.

    In other words, this proposal doesn't SOLVE the problem - it exactly GUTS the entire idea. This ruse about "small business" is a bulwark of the Republican con.

  • exlibra on November 23, 2012 1:59 PM:

    Totally with Martin (@12:18), vis-a-vis the definition of "small" as referred to a business. 50 employees, maybe (and even that might be stretching it; most small businesses I'm familiar with consist of the owner couple and maybe 4-5 part-timers), but, 500?

    And yes, what bert-the-clock says is right on the money, too. I, personally, know someone who employs 4 people and would like to hire a 5th, so as to have a bit more time with his family, but can't afford it because of the healthcare costs. His business is doing quite well, but not, as yet, *well enough*, to do that.

    But I wish more of the (truly) small businesses learnt to file their personal and business incomes separately. It might be an extra nuisance, but it would be worth it, to take the better advantage of the small business carve-outs.

    And (also, too), 2% surcharge? Don't make me laugh. Doesn't begin to compare with a straight tax rate hike, when it comes to revenues. Not to mention that it's only slightly more than half of the ACA surcharge (3.8%); barely noticeable.

    Meanwhile... Don't forget that tomorrow is Small Business Saturday -- shop local, and support your independent business folk, who're trying to make a (modest, not obscene) living.

  • Jim, Foolish Literalist on November 23, 2012 2:19 PM:

    What pretty much everyone has said: I really doubt most people think "small business" means five hundred employees. the Commerce Dept has a list of gov't defined "small businesses" on its website, and I think most people would be stunned to learn what that is. It ain't the Mom'n'Pop cafe, hardware store or contracting business I suspect most people imagine it to mean. The abuse of that term would not be a bad theme for left-leaning blogs to start hammering on.

    Also, the sense I get here is that "millionaire" means a million or more in annual earnings. That is not how (I think) most people understand the term, but as one million in (not necessarily net) assets, and I think it's a bad word to start using too loosely

  • mudwall jackson on November 23, 2012 2:42 PM:

    here's the SBA's guidelines for what they consider a small business:


    SBA defines a small business concern as one that is independently owned and operated, is organized for profit, and is not dominant in its field. Depending on the industry, size standard eligibility is based on the average number of employees for the preceding twelve months or on sales volume averaged over a three-year period. Examples of SBA general size standards include the following:

    Manufacturing: Maximum number of employees may range from 500 to 1500, depending on the type of product manufactured;
    Wholesaling: Maximum number of employees may range from 100 to 500 depending on the particular product being provided;
    Services: Annual receipts may not exceed $2.5 to $21.5 million, depending on the particular service being provided;
    Retailing: Annual receipts may not exceed $5.0 to $21.0 million, depending on the particular product being provided;
    General and Heavy Construction: General construction annual receipts may not exceed $13.5 to $17 million, depending on the type of construction;
    Special Trade Construction: Annual receipts may not exceed $7 million; and
    Agriculture: Annual receipts may not exceed $0.5 to $9.0 million, depending on the agricultural product.

  • Mimikatz on November 23, 2012 4:03 PM:

    This is mostly small potatoes compared to the break millionaires get on investment income. It is absolutely essential to end the 15% rate for dividends, and capital gains should be taxed at 20% for people in the 25% bracket and at 25% for people in the top brackets. Getting dividend income to 35% is pretty huge, even if the top rate doesn't go to 39%.

    I like the idea of ending the personal exemption and capping deductions at the median income level (no deductions beyond $50,000, the 2011 median) for people in the top 2 brackets if they can't raise the top brackets. And possibly subjecting all income to the top bracket 35% amount for incomes over $1 million, rather than just income over the cutoff level.

  • mb on November 23, 2012 7:35 PM:

    If you are going to carve out exemptions for "small business" then number of employees should not be the only criteria. No question -- 500 employees is no small business regardless, but wherever you set the number, it is too easy to manipulate the number of employees. "Small" should be defined by other criteria such as gross sales less than, say, $5M -- or some ratio of revenue to staff size. Otherwise, we inevitably end up with things like the Koch bros. being classified as a "small" business just cause there is only a few people in their management company. I'm all for protecting small businesses and family farms -- as long as that's really who's getting the benefit of the tax break.

  • SK on November 24, 2012 3:45 AM:

    This is a silly argument. My experience is typical. I began my business like most do as a "sole proprietor."

    As a sole proprietor, I was taxed on the profit of my business as if that all went into my pocket, (whereas this really was mostly in things needed for the business like inventory as of the end of the year) but it wasn't a large amount or a big issue to me, to begin with.

    When my gross sales hit about a million, and my sole proprietor taxes grew too high, my accountant said it was time to incorporate the business, to reduce the business tax, and only the income I took for myself would be taxed - like anyone else's.

    This option is open to all momnpop businesses whenever they want, to become an S Corp or C Corp.