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Allan Sloan

Small Business, Ill-Defined

By Allan Sloan
Tuesday, October 19, 2004; Page E03

You may not have heard my name mentioned, but I was a hot item of discussion during the Bush-Kerry debates. How can that be, given that the words "Allan Sloan" passed the lips of neither Kerry nor Bush? Because it turns out that I'm one of the 900,000 top-two-tax-bracket "small businesses" that Bush claims will be hurt if Kerry succeeds in enacting his proposed tax plan and whose pain will cause them to hire fewer people. This has become a key part of the debate, because everyone -- even me -- loves small business. It's Mom and apple pie and self-reliance, and employs zillions of people.

But what exactly is a "small business?" Given that I work full time at Newsweek, how did I become one of them? The answer is that the president's definition of "small business" is somewhat liberal, to say the least.

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By Bush's definition, any taxpayer with even a single dollar of self-employment income or partnership income or farm income or income from a Subchapter S corporation is a small business. This makes no sense whatever. Take me, for instance. My wife and I, who are in a top bracket, derived 1.36 percent of our income last year from the payments I get doing radio and TV commentaries. That gave me self-employment income. (The Bush campaign confirmed that, yes, I'm one of the 900,000.) As Kerry pointed out during the second debate, the $84 that Bush got from a timber property made Bush a "small business," too. (Hence Bush's "Need any wood?" crack, the best line in 4 1/2 hours of debates. But I digress.)

According to the Tax Foundation, a conservative outfit, 74 percent of the taxpayers in the top two brackets have business-related income. But having business-related income isn't necessarily the same as being a small business. Is my delivering commentaries or Bush cashing a royalty check or a TV anchorman owning a farm-income tax shelter the same as being an entrepreneur? Clearly not. All three of us have business-related income, but we're not businesses and we don't hire anybody.

According to IRS statistics, as interpreted by both the Tax Foundation and the liberal Tax Policy Center, about a million taxpayers in the top two brackets last year had the kind of income that Bush claims makes you a small business. (The Bushies have rounded down to 900,000.) The Bush campaign itself is careful to call these high-bracket taxpayers with business income "small business owners and entrepreneurs." That's accurate. But the president calls these taxpayers "small businesses," which isn't accurate at all.

Let's take a law firm that has 50 partners who are in the top two tax brackets. You've got 50 small businesses by Bush's definition -- but there's only one business, the law firm. Will raising the tax rate on what the firm's partners distribute to themselves cause the firm to hire fewer people? Clearly not. The firm will hire or not hire based on whether having another employee makes financial sense, not on what its partners pay in income tax. The same presumably holds true for any business -- you hire on the basis of whether you can make more money with an additional employee, not on the basis of how much tax you pay on your profits.

How many high-bracket taxpayers with business-related income are actually what a normal person would call a small business? No one knows. Not the IRS. Not the Tax Policy Center or the Tax Foundation, both of which talk about how murky the data are and how you can interpret the numbers in a variety of ways.

To be fair, Kerry has definitional issues of his own. First, he conflates "$200,000 a year" with "rich," whatever "rich" means. A $200,000-a-year, two-earner two-kid household with a big mortgage in Silicon Valley isn't the same as a retiree in a low-cost rural area with $200,000 of pension and investment income. Yet to Kerry, they're both "rich."

Second, Kerry proposes to raise taxes (or, as he'd say, roll back Bush's tax cuts) for people in the top two tax brackets -- but talks about "$200,000" rather than "top two brackets." You can see why, given how few voters are tax wonks. But -- trust me on the math -- you can earn less than $200,000 a year but still be in the top two brackets or earn more and not be in them. The Kerry campaign says it has a plan to keep the sub-200K crowd out of the top brackets and won't raise taxes on high-deduction, 200K-plus households that fall below those brackets. Should this ever come to pass, it will be yet another bonanza for the tax-preparation industry.

So there you have it. To Bush, I'm a small business. To Kerry, I'm rich. Even though I consider Bush the more egregious, both these guys are still examples of what Benjamin Disraeli, the 19th-century British statesman, would have said were he witnessing this campaign: "There are three kinds of lies -- lies, damned lies and election-year statistics."

Sloan is Newsweek's Wall Street editor. His e-mail address is sloan@panix.com.


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