The myth of mom-and-pop businesses

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Small business is the magic pony companion to baseball, motherhood and apple pie in the pantheon of unassailable American icons. Get crosswise with the mythical land of the mom-and-pop free market and you’re in for a world of hurt.

Fortunately, we have clear-eyed professors of commerce who resist the urge to get squishy over such sentimental mumbo-jumbo. Butterflies, rainbows and campaign stump speeches. Beh. They traffic in data.

Meet Martin A. Sullivan, Ph.D. Ex-U.S. Treasury economist. Tax blogger. Badass.

Sullivan slays the reflexive trope that tax cuts for small businesses are a cure-all to America’s prolonged economic stumble in a recent post at Tax.com. For one, there’s no hard and fast definition of “small business.” It can refer to your local family-owned corner stone or multinational corporations, depending upon who is wielding the ideological stick.

He cites Methodology for Identifying Small Businesses and Their Owners (8-2011), a new Treasury Dept. study of newly accessible tax data that significantly readjusts the definition of small business by eliminating hedge fund investors, independent contractors and other oddball employee classifications from the mix.

Sullivan crunches the numbers and finds that conflating tax cuts for the rich as support for small business is laughable.

A mere eight percent of small business owners qualify for the Bush tax cuts. Eight measly percent. And if the tax rate brackets expire, the pre-2001 schedule will go back into effect — a jump of a paltry three percent for the highest wage earners. The lowest end of the income scale, people making under $34,550 per year, would see a five percent increase in their tax rate.

However, if anyone questions Sullivan’s tax break bona fides, he concludes:

There are economically defensible reasons for keeping high-income rates from rising. For example, because wealthy taxpayers do the lion’s share of saving and investing in this country, it makes sense from the perspective of supply-side economics to prevent their rates from rising. Of course, this has to be weighed against some people’s concerns about fairness and everybody’s concern about larger deficits. What is clear from the Treasury data is that the defense of small business should not be the basis for any decision about tax rate changes on the wealthy.

Sullivan’s take-away: By accurately characterizing the true definition of small business the magnitude of repealing the temporary Bush tax cuts is “not nearly as large as the defenders of rate cuts would like the public to believe.”

h/t TaxProf Blog