On Monday, Treasury Secretary Paul O'Neill kicked off national "Small Business Week" by issuing a press release that claimed George W. Bush's proposal to cut the top income tax rate would benefit not only super rich folks, but more than three quarters of all small business owners as well. "Do you know who benefits from cutting the top tax rate? It's not who you think," said O'Neill, doing his best impression of a late-night cable pitchman. According to the Treasury Department, which is quickly gaining a reputation for fudging the numbers, 77 percent of small businessmen would get a tax break if the top rate were reduced from 39.6 percent to 33 percent, as Bush has proposed. Citizens for Tax Justice, a nonprofit watchdog group, countered that only one out of every 16 small businesses -- about 6 percent -- would get a tax break. What gives?
Bush has resorted to amazing numerical contortions to portray his tax cut as beneficial to the "middle class" and "working folks." Small businesses fit this populist mold -- they're the apple pie and baseball of American tax policy. So Bush has gone out of his way to sell his cut as one that will help them. In March, this landed Bush in hot water. As Tim Noah pointed out in Slate, Bush erroneously claimed that 17.4 million small businesses stood to benefit from lowering the top rate. Actually, the number was a fraction of that. Bob McIntyre of Citizens for Tax Justice noted that only 691,000 people in the entire country paid the top rate last year. It turned out that the Treasury Department, in its zeal to support Bush's plan, issued a press release so convoluted that it confused even the president's handlers. They've since backtracked.
No matter. Because the Bush Treasury Department is back with a new numerical sleight of hand and dammit, they're going to spin you on small business tax cuts if it kills them! The trick this time is not how many people pay the top rate, but what actually constitutes a small business. Most people think of mom-and-pop grocery stores and family farms, which is what the administration would prefer. But the tax jargon in the new Treasury press release is gives away the game: "Owners of flow-through entities, including small business owners and entrepreneurs, receive 77 percent of the tax relief" from cutting the top rate, it reads. Don't know what a "flow-through entity" is? Then you might be a "small business owner" and not ever realize it.
Thy key to the Treasury Department's outlandish claim is that they're counting far more than mom-and-pop groceries in the category of small business. Flow-through entities also include partnership and something called Subchapter S corporations -- basically, a corporate form of business in which profits and losses are passed along to stockholders, results in the corporation being taxed on an individual shareholder basis as opposed to corporate taxation (sort of like quarterly distributions from mutual funds). This way of reasoning allows Bush officials to claim, as economic adviser Larry Lindsey did yesterday, that thousands of investors are, in fact, small business owners. "Most of the taxpayers in the top bracket are small businesses," he said. But that depends on what your definition of "small business" is.
Take away these dubious "business owners" and the truth about Bush's tax cut comes into focus. The number of actual small business owners who'd benefit from Bush's top rate cut is really more like 160,000, or 1 percent. Yet the cost is estimated to be $240 billion over 10 years. Minus the spin, Bush's small business tax cut looks an awful lot like his overall tax cut -- heavily geared toward the wealthy.