Small Business Sense

The New York Times takes a stab at the small biz tax question

After all the plumbing business, I was heartened to see this passage in the Times today:

So will Americans who are in business for themselves have to pay more taxes if Mr. Obama is elected, as Mr. McCain asserted?

According to figures compiled by the Small Business Administration, there are fewer than six million small businesses that actually have payrolls. The rest are so-called nonemployer firms that report income from hobbies or freelance work done by their registered owners, earning as little as $1,000 a year.

Of these, according to a calculation by the independent, non-partisan Tax Policy Center, fewer than 700,000 taxpayers would have to pay higher taxes under Mr. Obama’s plan. But even some of these are not small-business owners in the traditional sense; they include lawyers, accountants and investors in real estate, all of them with incomes that put them in the top tax brackets.

This is solid stuff, and it introduces a previously unmentioned point: a small business isn’t always a company with employees. Sometimes it’s just an individual, whose entire business is doing whatever it is that they do: artists, freelance writers, accountants. And in these cases, the argument that an increased tax burden would prevent the employer from “creating jobs” doesn’t apply, because these operations are one-man bands.

Next, however, the Times undermines its own good work with the following statement:

So are there “millions more like Joe the Plumber,” as Mr. McCain contended? Probably not. Mr. Obama may well have been correct when he stated that “98 percent of small businesses make less than $250,000.”

Instead of going to an expert to evaluate McCain’s claim and reach a solid conclusion, the Times cops out with a “probably not” and a kinda-sorta reference to an Obama talking point. Not good enough.

The article also plays dangerously with language and statistics in a way that seems to intentionally diminish McCain’s claims, saying “there are fewer than six million small businesses that actually have payrolls. The rest are so-called nonemployer firms.”

The key words here are “actually” and “the rest”. Here’s why: both of these words imply that comparatively speaking, the number of nonemployer firms greatly exceeds the number of firms with payroll. This is true. According to the U.S. Census Bureau, there were 5.7 million companies with payroll and 17.6 million firms without, in 2002.

But here’s a key fact from the Small Business Administration:

A nonemployer firm is defined as one that has no paid employees, has annual business receipts of $1,000 or more ($1 or more in the construction industries), and is subject to federal income taxes. The Census Bureau provides nonemployer business data. According to Census, “Nonemployers account for roughly 3 percent of business activity [in terms of sales or receipts]. At the same time nonemployers account for nearly three-quarters of all businesses. Most nonemployer businesses are very small, and many are not the primary source of income for their owners.

The problem is, Obama’s 98 percent claim lumps together people who operate the types of small businesses we imagine—plumbers, restaurants, mom-and-pop shops—in which people rely fully on their businesses as their income, and the types of small businesses we forget, that are really side businesses, not the individual’s only job.

Obama can twist and turn numbers however he pleases. But, in this story, the Times needed to go further and explain that those numbers are misleading. Numerically speaking, yes, the majority of small businesses will not be affected by the next tax. But, more logically speaking, the types of businesses that we commonly think of as small businesses—and the ones who are in a position to create more jobs and expand—may very well feel the pinch. Instead of merely quoting the candidates and pulling public statistics, this piece needed an expert in small-business tax law to take the story further. As it stands, tacked onto bottom of a profile of “Joe the Plumber,” it fails to bring clarity to a key issue in this campaign.

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Katia Bachko is on staff at The New Yorker.