by Ernie C. Jolly
In its September 2012 optimism survey, the National Federation of Independent Business reported that small business owners considered unfair taxes to be their single greatest impediment to success. Consequently, it is understandable why the government’s role in spurring small business development has become a hot-button issue on the 2012 presidential campaign trail. But how could we rid the tax code of the unfairness that vexes so many small business owners? One way would be to increase taxes on the wealthiest individuals and close corporate tax loopholes to ensure tax fairness, and to generate revenue that could be used to fund programs that support small business development.
Unfortunately, the political discourse on the impact of tax policy on small business development remains muddled at best. While campaigning in Ohio, presidential hopeful Mitt Romney implored America’s youth to start businesses through what he termed as “risk-taking,” even if it means using their parents’ savings. Romney’s comments became a talking point for San Antonio Mayor Julian Castro, a keynote speaker at the 2012 Democratic National Convention, who mocked Romney’s remarks while contending that federal investments in public education, infrastructure, and job-training would do far more for the American entrepreneurial spirit than impractical risk-taking. These differences in the approaches of Romney and Castro represent a larger philosophical debate among policymakers regarding the government’s role in supporting small businesses.
Some policymakers argue that extending the Bush-era tax cuts for the wealthiest individuals (those in the top two tax brackets) will allow small businesses to grow and provide new jobs. However, this argument does not square with the facts. The Congressional Research Service (CRS) reported that in 2007 and 2009, fewer than 2% of filers in the top two brackets were small business owners. In other words, if the Bush-era tax cuts for the wealthiest individuals expire, needed revenue will be obtained without increasing the tax burden on 98% of small business owners.
While the myths of the Bush cuts continue to shape the political discourse on tax policy, actual hindrances to small businesses remain unexamined. Small businesses must compete with multinational corporations that are able to avoid taxes by shifting profits earned in America to foreign subsidiaries. By exploiting corporate tax loopholes, multinational corporations avoid paying as much as $60 billion annually, according to CRS. The Senate Permanent Subcommittee on Investigations released a scathing report in September of 2012, detailing various ways multinational corporations have been able to legally avoid paying federal taxes. Schemes employed by multinational corporations include, but are not limited to, the following: (1) transferring property rights and assets to jurisdictions outside of the United States to avoid taxes on such property and (2) accumulating debt in the United States, but not increasing the corporation’s overall debt exposure, so as to receive federal tax deductions on debt interest. By employing such schemes, multinational corporations are able to avoid taxes on income earned in America. Consequently, small businesses, many of which are solely domestic, assume a greater tax burden on income earned in the United States than their multinational competitors and are disadvantaged.
The budget cuts that loom as a result of sequestration are predicted to result in the loss of more than 2 million jobs, nearly half of which are provided by small businesses. The subsequent inability of the federal government to fund programs that support small businesses – such as their procurement programs – will put others out of jobs. Additionally, cuts in education, transportation, and job training will adversely impact small businesses.
Congressional action on the budget is necessary for economic stability and small business growth. If small business development is a priority for policymakers, eliminating the Bush-era tax cuts for the wealthiest individuals, while plugging unfair corporate tax loopholes, may be a practical solution. Such policies would ensure small businesses thrive as our economy continues to recover.