The small business myth: when the government tries to help small businesses, it hurts businesses (and taxpayers) of all sizes.

• Author: de Rugy, Veronique
• Position: Column

WHO BETTER embodies the American dream than a small-business owner? Independent, self-reliant, flexible, and hardworking, small-business owners, we are always told, are the corner-stone of economic growth and prosperity. That's why lawmakers are always pushing policies to help them prosper.

During recessions, small businesses are inevitably hailed as the key to recovery and showered with still more targeted programs. This latest recession is no exception.

In his State of the Union address this year, President Barack Obama announced that "jobs will be our number one focus in 2010, and we're going to start where most new jobs do, with small business." Since then he has proposed and signed a series of targeted tax breaks. The president also asked Congress recently to use $30 billion that had been set aside from the Troubled Asset Relief Program to start a new program providing loans and tax credits to small businesses.

These policies are based on a myth. It's not true that the key to boosting employment is to help small businesses, even though Washington's definition of the term is far more expansive than you might think. According the Small Business Administration, a small business is a firm with fewer than 500 employees--not just your average mom-and-pop shop. By this definition, 99.7 percent of all employer firms are small. Still, big companies--the ones that employ more than 500 workers--account for about half of the country's total employment. In the 1990s, as the McKinsey Global Institute economists James Manyika and Byron August recently explained in The Washington Post, large multinational corporations created jobs more rapidly than other companies, and they have been vital to employment in the subsequent decade as well. In other words, new jobs come from small and big businesses. If your goal is to boost jobs, it doesn't make sense to favor one over the other.

In any case, the effectiveness of the policies aimed at helping small firms is dubious. Consider the tax credit for new hires, a favorite of every administration. Obama wants to give enterprises of any size a $5,000 tax credit for each employee they add to their payroll this year. Startups launched in 2010 would be eligible for half of the tax credit. This is a bigger version of the $1,000 tax credit passed by Congress with the help of four Republican senators back in February.

These politicians rightly assume that lowering the cost of employment helps firms keep their current...