Silver Buzz Cafe
September 23, 2010
There are few issues being debated in the mid-term election season that seem to be as clear cut as the Bush tax cuts debate. President Bush cut taxes for low and middle income families, the rich and small businesses. That sounds fine, until you realize that his administration didn’t make any provisions for making up for the lost revenue. He actually added trillions of Dollars to the deficit, knowing that making up for it wouldn’t be his problem. The Senate passed the cuts using the reconciliation process, so there was an automatic ten year limit on the cuts, which expires this year. If congress does nothing about the cuts, they’ll expire and everyone will see a tax increase, which the GOP leaders have cast as “the Obama tax increases”. The Democrats are too lily-hearted to hail the event as the end of the “Bush tax deficit fiasco”.
The administration wants to continue the cuts for lower and middle income taxpayers and let the cuts for rich people (those with taxable incomes of above $250,000 a year) and small businesses expire. The GOP immediately leapt to the defense of the rich and the large corporations. However, they put a nice spin on it all. They’ve toned down mentioning the rich and have concentrated on helping small businesses. That sounds really good. Small businesses generate most new jobs, on their way to eventual oblivion or becoming big businesses. So, what’s the problem with defending “small businesses”?
The first cracks in the facade were revealed by the following two facts:
- Democratic Party line: Just under 3% of small businesses will see a tax increase if the cuts are allowed to expire.
- Republican Party line: Small businesses account for about 50% of the revenue from the top two tax brackets.
That’s odd. Both facts are correct, but how can so few “small businesses” generate so much tax revenue? The answer lies in the definition of “small”. Most people think of them as “Mom and Pop” businesses that employ a few people. However, those businesses generally don’t generate enough profit to put them into the top tax brackets. The IRS regards small businesses as ones that don’t file federal taxes directly, but file via the owning shareholders’ individual returns. That allows the billionaire Koch brothers, for instance, to channel the profits from over 600 “small businesses” through personal returns, concealing the true facts about their trillion Dollar business interests. It also allows large corporations with up to 100 owners to file this way (as S-Corporations) and enjoy lower tax rates, averaging around 15%, or about a half of what they’d pay otherwise. About 750,000 individuals are involved in this scam.
It all depends on what you call “small”
The list of “small businesses” contains some very interesting surprises, including:
- Bechtel: America’s largest civil engineering company, with $31.4 billion in revenue and 44,000 employees worldwide. Bechtel built the Hoover Dam and the Channel Tunnel between the United Kingdom and France.
- Koch Industries: The second largest privately held company in the United States, with $98 billion in revenue and about 80,000 employees.
- McIlhenney Company: The Tabasco maker, with $250 million in revenue in 2007 and 200 employees, which brings it closer to the general perception of a small business, but still makes it a big business in fact.
- Price Waterhouse Coopers: A global accounting firm with $26 billion in revenue in 2009 and over 163,000 employees worldwide.
Small businesses also have an advantage when bidding for federal contracts. However, given that it’s really easy to set up an S-Corporation and label it a small business, there’s a lot of cheating going on. The American Small Business League looked at the top 100 contracts classified as small business contracts for fiscal year 2009. They found that almost two-thirds of the dollars reported as going to federal small business contracts actually went to larger corporations, including AT&T, Dell, General Electric, Hewlett-Packard, Lockheed Martin, Office Depot and Xerox.
So, it’s easy to explain the apparent contradiction that only 3% of small businesses will be affected by allowing the tax cuts to expire and the 50% of the (top 2 brackets) tax revenue they generate. The small businesses aren’t really small at all. What’s worse is that if their tax cuts are allowed to stay in place they’ll generate a deficit of around $700 billion a year. That’s revenue that the rest of us, the low and middle income taxpayers, will have to make up for. Remember that President Obama lowered the deficit by about 7% last year, after inheriting a $1.7 trillion deficit from President Bush.
As these “small businesses” are actually fronts for extremely rich individuals and large corporations, who tend to donate money to the GOP, it’s easy to see why Republican leaders were eager to jump in and defend them against the interests of the rest of us. Also, with the new Supreme Court ruling that allows corporations to spend freely on political campaigns, the Republicans are currently outspending Democrats by a factor of 7:1 in the mid-term elections. The money is largely being channeled via special interest groups, such as 527s.