04/25/2012 05:05 pm ET Updated Jun 25, 2012

Congress Needs to Decide How Big a "Small" Business Is

Today, under various federal laws, the term "small business" can define a range of companies, from businesses with less than 50 employees, to publicly traded corporations as large as Lockheed Martin -- the federal government's largest prime contractor.

This question of how big a "small business" is, is of critical importance to our national economy.

For example, when the House approved the Republican-sponsored "Small Business Tax Cut Act (H.R.9)" last week, legislators neglected to mention that under the bill many hedge funds, investment firms, C-corporations and pass-throughs worth billions of dollars would also be eligible for the 20 percent income tax deduction next year.

The text of H.R. 9 states that a "qualified small business" may receive a 20 percent deduction on their active business income taxes for the taxable year. A "qualified small business," for the purposes of the bill, is defined as 500 employees or less.

But when you look at the composition of all U.S. firms, a size standard of 500 employees as a "small business," makes no sense. According to the Census Bureau, 98 percent of all U.S. firms have less than 100 employees and 89 percent of all U.S. firms have less than 20 employees.

Arbitrarily using a 500 employee size standard would therefore grant thousands, if not millions of large businesses a 20 percent tax deduction and discourage firms just shy of the 500 employee threshold from making new hires (What's more, any good economist can tell you that temporary tax cuts for any size business do not create jobs -- last week Republican Congressman Tom McClintock even acknowledged that at best, H.R. 9 "produces a one-year sugar high until the bills come due").

Christian Science Monitor Guest blogger Howard Gleckman also suggested in a blog on Wednesday that "Even Mitt Romney's former investment firm Bain Capital might be eligible for this "small business" subsidy. Although it manages an estimated $66 billion, Bain employees only 400 professionals. With a lean enough support staff, it might be one of those lucky small businesses."

This misguided piece of legislation therefore highlights the extremely important question -- how big is a small business?

If you look in the Federal Acquisition Regulation (FAR) today, a "small business" varies by number of employees and annual revenue, depending on its industry. These different size standards range anywhere from 100 to 1500 employees for employee-based business size determinations, and from $4.5 to $36 million annual revenue for revenue-based business size determinations. The Small Business Act also states that a small business must be independently owned, which would exclude publicly traded companies.

Yet the latest evaluation of federal data from the Obama Administration shows that hundreds of publicly traded companies, even Fortune 500 firms receive federal small business contracts every year. Other loopholes allow companies as large as Lockheed Martin and General Dynamics to hijack federal small business contracts for up to five years if they purchase a small business that holds a federal contract.

Although H.R. 9 is expected to die in the Senate, it should be clear that whether it's tax policy or acquisition policy, the question of how big a "small business" is, needs to be resolved.

If Congress were to establish policy that prevented publicly traded corporations and giant companies from receiving federal small business contracts and tax subsidies, our national economy would vastly improve, because legitimate small businesses are the engine of economic growth in America -- according to the Census Bureau, legitimate small businesses create 90 percent of net new jobs.

I would imagine that 99 percent of people in America would agree, that whatever Congress decides a small business is, Fortune 500 firms and multi-billion dollar investment firms should not be allowed to fit into that definition.