Are Small Businesses Special?

The small business is now an important players part of the policy narrative. Policy discussions in many parts of the world have adulated small businesses to the extent that every policy measure is often considered inadequate unless it delivers some gains for small businesses. Richard Rubin's article in the Congressional Quarterly here offers a level headed questioning of the assumptions that there is something inherently superior about small businesses and that definition is itself an arbitrary classification of very diverse firms.

To my mind, he makes two points that resonate most with me. First, in the US as in many countries, the real definition of small businesses is such a problem that it makes little sense in the scheme of things. Most definitions concentrate either on turnover or the number of employees and these are fraught with dangers as there are many businesses that could have high turnovers and yet employ few people. the reverse is also demonstrably true. However, the political appeal that comes with designing policies to benefit the "small business" is one that politicians see clearly and therefore respond to. 

The second on is that nobody wishes to be seen as criticizing the corporate welfare given to firms defined as small enterprises, with the result that there are extremely perverse incentives due to tax concessions and other exclusions that are meant to help these businesses. Creation of the facility that allows individuals to report income earned from firms together with other income just makes tax policy and administration difficult.

It is clear that I am an agnostic about the view that small businesses posses specific attributes that make them particularly worthy of special regard above other firms. Indeed, there may be reason to believe that the discrimination against large firms in some instances causes massive distortions and creates stunted firms with lower productivity. The designation, small businesses is just a political term and has little relevance for market functions.