Republican Mythology: Small Business Facts and Fantasies

Nothing is more predictable than the insertion of the Great GOP Myth that Republicans protect the interests of SMALL businesses into any political campaign.  First, let’s deal with some small business FACTS.

As of 2007 there were 27,757,676 firms in this country.   21,708,021 of these were non-payroll companies.   6,049,655 were firms with payrolls.   The firms operated 29,413,039 establishments.   The firms with payrolls operated 7,705,018 establishments.  [Census]

As of 2008 there were 21,351,320 non-employer firms in the United States, and another 5,930,132 firms which had people on payrolls.  [Census]   If we make a pie chart of establishments and employment numbers it looks like this:

The pie chart makes it obvious that most of the business establishments in this country employ from 0-4 employees.    It also makes it perfectly clear that any legislation which exempts companies with fewer than 500 employees from taxation or otherwise gives them a break will affect a preponderance of the business establishments in this nation.  So far so good for the GOP mythology.  However, if we stop at this point and simply characterize American small business solely in employment and establishment figures  we’re leaving out an important part of the overall picture.   Business revenues or receipts.

Let’s put those back into the picture.

Here’s the point at which not all tax breaks are created equally.  Most firms in the U.S. are bringing in less than $500,000 in receipts annually.  Formulas based on the number of employees alone will necessarily benefit those establishments which may hire fewer than 500 persons, BUT which may also be generating receipts well over the common $500,000 threshold for receipts.   Consider the lobby shops for example.

Patton Boggs LLC leads the pack with retainers of $47,710,000 for 2011, Akin Gump pulled in $37,930,000, Podesta Group $27,300,000, and Van Scoyoc $24,830,000.  [OpenSecrets] Some 110+ lobbyists may be employed, plus support personnel, but the major lobby shops will still be classified as “small” business if the number of employees is the sole definition of what it means to be a small business.   We can get another illustration by looking at hedge fund employment.

Hedge funds tend to hire based on AUM (assets under management) figures and as of 2008 there tended to be 1 employee for every $54 million under management.   The Hedge Fund Review (2008) described employment and staffing as follows:

Employee numbers more than doubles to 36 on average when the management company reaches the $1-$5 billion rage. Efficiency increases on average 47% to $84 million per employee.

“The biggest leap in organisational size occurs when AUM grows to $5-$11 billion. Employee numbers tends to triple to 120 while managing on average $82 million per employee. The report concluded there was no one reason for this change, unless it could be attributed to the fact that most companies managing these amounts tend to be platforms or multi-strategy funds. A full 90% of funds surveyed in the $5-$11 billion range were platform or multi-strategy compared with 55% of the $1-$5 billion funds.”

Again, if the number of employees is the exclusive definition for what constitutes a small business then the “average” hedge fund fits the categorization, and as of October 2003 there were approximately 6,000 to 7,000 hedge funds operating in the United States. [SEC] The old radio show disclaimer may be modified and applied here, “any resemblance between a small retail business and a hedge fund is purely coincidental.”

And yet… The Republicans continue to claim that to allow the Bush Tax Cuts to expire for those earning more than $200,000 annually would “hurt” small business.”  Not really.  Only about 3% of “small business” operations would be affected. [Politifact] [Gavel]

And yet… The Republican controlled House of Representatives was pleased to pass a “small business” bill (H.R. 9) with a $46 billion loophole for the 1%.

“Under Rep. Cantor’s bill, in general, all businesses with fewer than 500 employees are eligible for the tax deduction on their active domestic income.  The term “small business” evokes images of mom-and-pop stores or startups hoping to expand, but in fact a very wide range of enterprises owned by extremely wealthy people have fewer than 500 employees. These businesses and their owners would reap a giant windfall from the Cantor bill.
An exchange during the House committee’s consideration of the bill between Rep. Xavier Becerra (D-CA) and Thomas Barthold, who heads Congress’s nonpartisan Joint Committee on Taxation, underscored that Rep. Cantor’s tax cut could potentially provide large windfalls to the owners of a host of enterprises that are a far cry from the image Cantor tries to evoke of the struggling small-business owner.”  [CAP]

Again, this is what happens when the number of employees is the sole factor in defining a “small business.”  76% of the businesses in the United States have annual incomes below $200,000 but this group would see only 16% of the benefits of H.R. 9.  55% of small business employers have incomes of less than $100,000, but that group will secure only 6% of the bill’s benefits.  [CAP]  The Republicans offered no “payfor” to cover the costs of H.R. 9.

And yet… the presumptive GOP candidate for the presidency is offering an economic plan that “can’t be scored” and to date can’t seem to be specified.  The Tax Policy Center explains: “Because Gov. Romney has not specified how he would increase the tax base, it is impossible to determine how the plan would affect federal tax revenues or the distribution of the tax burden. ”  At one point the former Governor suggested that he might close the loophole on mortgages for vacations homes for those in the upper income brackets, but (as has been a rather common practice for the Romney excursion into presidential politics) he quickly walked that suggestion backward.  [TP] [WSJ] [TO]

To date the Romney Campaign has relied upon generalities — Glittering and Otherwise — to attract voters.  “Gee, Mr. Romney wasn’t making a policy statement about eliminating the vacation home mortgage deduction, he was just tossing out an idea,” from an economic plan that “can’t be scored.”

The “plan” assumes that lowering taxes will mean faster economic growth, although the statistics demonstrate the reverse.   [AngryBear] [Kimel: Angry Bear] [Lynch: EPI] “The claim that the plan’s large tax cuts would be financed in significant part by greater economic growth is one that proponents of tax cuts often make, but that Congress’ official scorekeeper of tax proposals — the Joint Congressional Committee on Taxation (JCT) — and most other mainstream analysts do not accept. The claim is also inconsistent with the historical evidence.”  [CBPP]

The “plan” assumes that lowering taxes for the ultra-rich won’t have a significant impact on federal revenues, even though it is obvious that lowering tax rates create lower revenues.   There is evidence to the contrary:

“…a close reading of the document from the Romney campaign about the plan, as well as Governor Romney’s February 23 op-ed in the Wall Street Journal and statements by Romney campaign advisor Glenn Hubbard, suggest that the plan is not, in fact, intended to be revenue neutral. Neither the campaign document nor the Romney op-ed actually says it is. Instead, both state: “Stronger economic growth and reductions in spending will help to ensure that these tax cuts do not expand deficits.” In other words, along with scaling back unspecified tax expenditures, the plan relies in substantial part on “dynamic scoring” — an assumption that tax cuts will boost economic growth and, in turn, federal tax revenues — and very deep budget cuts to avoid expanding the deficit.”  [CBPP](emphasis added)

This all sounds perilously close to the Wall Street penchant for adopting the precepts of the “mark to mythology” school of accounting.

Meanwhile back in the real world…

What we probably ought to be requiring of any economic plan set before the American voting public this campaign season are some basic concepts such as:

1. Any economic plan involving government expenditures and tax proposals should at least be revenue neutral.   And, that’s real revenue, not conveniently redefined revenues, which beset the Hubbard analysis.  [Goolsbee][TP]

2. Any economic plan should  reduce the federal deficit.

3. Any tax reform plan should reduce corporate incentives for overseas investment, and encourage domestic investment.

4. Any tax reform plan should not exacerbate the already alarming level of income inequality, and should be based on progressive taxation within the classic definition of the term.   It’s fine if the rich get richer, but if this is accomplished by diminishing the resources of the Middle Class then our consumer based economy is in serious trouble.

5. No plan should plan should reduce our capacity to care for our children, our elderly, our veterans, or our infrastructure.

Small business owners throughout the nation need a well maintained and improved physical infrastructure, assistance educating and caring for their children, security for their parents and grandparents, revenues generated from the capacity of their customers to pay for their goods and services, assistance with complex matters like dealing in foreign markets, and a level playing field with competitors.

They could probably do with a bit less highly generalized ideological gibberish about “no more taxes,” and “less is more.”   They could certainly do with an economic plan that isn’t “pie-in-the-sky-mark-to-mythology” generalities that are here today and walked back tomorrow.   Speaking specifically to Governor Romney’s plan — if it can’t be scored, then how is it to be trusted?

Additional Reading:  See “Six Tests for Corporate Tax Reform,” CBPP 2/24/12.   “Statistics about Small Businesses,” Census. “Did Hubbard Mean To Raise That? Austan Goolsbee, 4/25/12. “Taxes and Economic Growth,” Crawford, Angry Bear, 5/2/2012. “Over There: Euro Zone Unemployment rises to 10.7%, Calculated Risk, 5/2/2012. “Tax Cuts and Job Growth: They’re Just Not That Into Each Other,” Bernstein, 5/1/12.

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