Furthermore, by the Bush definition 32 million "small businesses" would see no tax increase. The ad doesn't mention that, of course. Nor does it mention Kerry's proposals for some tax cuts specifically targeted for small businesses.

(Update, Oct. 1: After this article was posted, the Tax Policy Center issued a new estimate that the number of small employers is 471,000 -- barely half the number the Bush ad claims.)

Actually, Kerry proposes no specific tax increase on small businesses at all, and in fact is proposing some targeted tax cuts for small businesses. What the Bush ad refers to is Kerry's proposal to raise taxes on individuals making more than $200,000 per year.

Republicans argue that taxing the affluent is, in effect, taxing many small business owners who pay taxes on their business income reported on their personal returns. And that's true enough.

But what we said last December in an article de-bunking a similar tax fable bears repeating here:

FactCheck.org (Dec. 19, 2003): By twisting statistics and over-hyping, Republicans are spoiling for themselves what would otherwise be a perfectly serviceable argument: lowering taxes on the most affluent Americans does indeed lower taxes on many small businesses, and thus creates more jobs. But not nearly as many as . . . Republicans are claiming.

It is true that what Kerry proposes would return the top rates on individuals making over $200,000 to 35% and 39.6%, compared to the nominal top rate for large corporations, which is 35%. Where the Republican argument goes off the rails is in inflating the number of "small businesses" affected by raising rates on those high-income individuals. Republicans count any individual as a "small business owner" who reports even as little as $1 of income from a sole proprietorship (reported on schedule "C" of federal income-tax returns), a partnership, or a "Subchapter S" corporation (one with fewer than 75 stockholders). In fact, the majority of those being counted as "small businesses" are really individuals who aren't primarily business owners, and a huge number have no employees.

Bush & Cheney as "Small Business Owners"

To find examples of this we need look no farther than the top of the Bush-Cheney ticket:

• President Bush himself would have qualified as a "small business owner" under the Republican definition, based on his 2001 federal income tax returns. He reported $84 of business income from his part ownership of a timber-growing enterprise. However, 99.99% of Bush's total income came from other sources that year. (Bush also qualified as a "small business owner" in 2000 based on $314 of "business income," but not in 2002 and 2003 when he reported his timber income as "royalties" on a different tax schedule.)

  (Oct 9; CORRECTION: What we originally reported as a "timber-growing" enterprise is actually described on Bush's tax return as an "oil and gas production" concern, the Lone Star Trust. We were confused because The Lone Star Trust currently owns 50% of another company, "LSTF, LLC", described on Bush’s 2003 financial disclosure forms as a limited-liability company organized "for the purpose of the production of trees for commercial sales." So, Bush does own part interest in a tree-growing company, but the $84 came from an oil and gas company and we should have reported it as such.)

• Vice President Cheney and his wife Lynne qualify as "small business owners" for 2003 because 3.5% of the total income reported on their tax returns was business income from Mrs. Cheney's consulting business. She reported $44,580 in business income on Schedule C, nearly all of it from fees paid to her as a director of the Reader's Digest . But giving the Cheneys a tax cut didn't stimulate any hiring; she reported zero employees.

Other examples of those counted as "small businesses" would include doctors, lawyers, accountants and management consultants who organize their practices as partnerships, and journalists who accept occasional fees for speeches or articles.

Who Would Be Affected?

When the nonpartisan Urban-Brookings Tax Policy Center ran the Kerry plan through its computer model, it projected that in 2005 a total of 995,000 persons with "business income" (or business loss) would see a personal tax increase under Kerry's plan. That's in line with various Republican calculations that put the total at up to 1 million or more.

But here's what the Tax Policy Center also found about those "small business owners" who would see their taxes go up:

• Only 49% of them actually got most of their income from business (485,000 of them).
• The large majority have no employees aside from themselves. Of the 487,000 who reported any business income on Schedule C, only 71,000 claimed deductions for wages -- fewer than 15% .

To be sure, Kerry's plan would in effect raise taxes on considerably more than 71,000 small-business owners with employees. The Tax Policy Center could not determine how many owners whose businesses are partnerships or Subchapter S corporations both had employees and reported income high enough to be affected. Those types of businesses tend to be larger and more likely to have employees than the owners of sole proprietorships who typically report on Schedule C. Census Bureau figures from 1997 show that 28% of all partnerships had employees, and 77% of all Sub-S corporations.  It is also true that at least some businesses that have no direct employees other than the owner still create jobs by hiring contractors for services.

Still, it is clear that the Bush ad's 900,000 figure greatly exceeds the number of job-creating businesses that would be affected by Kerry's proposed tax increase. And the vast majority of small businesses would not be affected at all.

(Update, Oct 1: The Tax Policy Center refined its estimates after we posted this article and came up with a figure of 471,000 small employers who would see a tax increase under Kerry's proposal, including an estimate of sub-S and partnership filers who have employees. By this estimate, the figure used in the Bush ad is nearly double the real number.)

Who Would Not Be Affected

Bush's own Treasury Department estimates that a total of 33 million "small businesses" benefited from the Bush tax cuts on individuals, but most of them are in lower tax brackets.  So -- even accepting the 900,000 figure used in the Bush ad -- that leaves more than 32 million "small businesses" not affected by an increase in the top rates on individuals.

It should also be noted that Kerry is proposing several tax cuts specifically targeted to small businesses, including a refundable tax credit aimed at reducing the cost of health-care benefits, eliminating capital-gains taxes for "long-term investments" held for five or more years in small businesses, and a "new jobs tax credit" for small businesses that add new jobs in 2005 and 2006. What Kerry is proposing for small business can be found on his Web site.

2000 Federal Income Tax Returns of George & Laura Bush , Tax History Project

2001 Federal Income Tax Returns of George & Laura Bush , Tax History Project.

2002 Federal Income Tax Returns of George & Laura Bush , Tax History Project.

2003 Federal Income Tax Returns of George & Laura Bush , Tax History Project.

2003 Federal Income Tax Returns of Richard & Lynne Cheney , Tax History Project.

2003 Public Financial Disclosure of Richard Cheney , Opensecrets.org.

2003 Public Financial Disclosure of George W. Bush , Opensecrets.org.

David Wessel, "Undoing Tax Cuts Will Have Little Impact On Small Businesses," Wall Street Journal, 1 April 2004: A2.

Urban-Brookings Tax Policy Center, "Kerry Plan vs. Current-Law, Size of Individual Income Tax Change, 2005 - - Distribution Tables by Size of Tax Cut - 2005"  Table T04-0144 , 16 Sep 2004.

US Census Bureau, "Statistics about Business Size (including Small Business)from the U.S. Census Bureau," Web site, accessed 23 Sept 2004.

"A New Era of Opportunity for Small Business,"  fact sheet, Kerry-Edwards 2004, undated.

Tax Policy Center Newsletter , "Kerry Tax Plan and Small Businesses," 30 Sep 2004.