I like the idea of categorizing The Satanic Verses as philsophy.  Certainly, both the concepts in the book and the ideas brought forth from its publication about the nature of art and the role of the artist are philosophically profound.

I think that Rushdie's Satanic Verses is his most significant work.  I know that this is most likely the most popular answer, but the book still generates controversy.  When the novel came out, I worked in a local library, and there was extensive discussion over whether it should truly be classified as fiction. Our head librarian wanted to shelve it with philosophical works because she felt that it was more important than just another fiction bestseller.

Moreover, students and others still find motivation to read The Satanic Verses when they learn that Rushdie was marked for death by several organizations because of the book.  In today's world of acceptance and open-mindedness, they are fascinated that a book could carry that much power.

Although I am not a huge Rushdie fan, I did read Shalimar the Clown after I finished Verses, and still prefer The Satanic Verses.  Shalimar just doesn't seem quite as original in style or theme as Rushdie's best-known work.

In my mind, I would define his essays, "Step Across This Line," as Rushdie's best work.  I think it reflects how he views the role of art, and the artist, and the purpose behind the creation of art.  What is most remarkable is that the essays collected span from 1992, the lifting of the Fatwa, to post 9/11.  It is interesting see that Rushdie had been writing about issues that became dominant in the wake of 9/11.  This collection of essays is so powerfully compelling in their articulations that I feel it is his best work.  In no way should this take from his other works (Midnight's Children and The Satanic Verses are powerful in their own right.)