The American private sector must be the main engine of the nation’s economy. President Obama said so during a major address last week in Ohio.
The drive and ingenuity of America’s small-business entrepreneurs and the skill and dedication of the nation’s workers made the United States the wealthiest nation on earth. President Obama said that, too.
Yet in the same address, the president disappointed small-business entrepreneurs when he offered proposals that have little possibility of jump-starting the economy’s main engine.
For example, suggesting a tax break by raising the level of spending small businesses can deduct poses a Catch-22 situation. While not a bad idea, the proposal ignores the fact that small firms don’t have the extra cash to spend - or immediate plans to spend it - in order to obtain the benefit.
It’s economics 101 multiplied by fear. Small businesses are afraid to hire or spend to expand because their customers aren’t spending. Customers aren’t spending because they fear for their jobs.
Fear and uncertainty silence cash registers, and none of what the president offered in his speech has the potential to make cash registers ring. To the contrary, the president’s proposals are more likely to help larger businesses in the long term. In this economy, the president and his advisers need to “think small.”
To light a fire under the economy and boost job creation at the same time, it is essential that the fears of the nation’s small firms be calmed and their worries about the future removed. They shouldn’t be expected to gamble on whether or not Washington is going to improve their livelihoods with some vague promise of better days ahead.
With confidence and certainty, small-business owners will do what they always have done: Underpin the nation’s economic structure, create jobs, pay meaningful wages and, yes, even boost tax revenues that can reduce the deficit.
These owners aren’t seeking government bailouts, and they abhor hit-and-miss stimulus spending programs, knowing that they’re the ones who ultimately will pay the tax bills.
Small-business owners are telling everyone who will listen, especially Congress and the White House, that there are some things they must have now if they are to bring people back to work. They want fairness in tax treatment, less regulation and reasonable paperwork.
Specifically, Washington should extend all of the current tax rates. Congress has just a few weeks to act before a year-end deadline that could wallop small firms with one of the largest tax increases in history. A failure to extend the individual income tax rates established a decade ago will significantly jack up tax payments for many small firms, three-fourths of which pay taxes on their business income as individuals.
The debate in Washington has focused on how many small businesses might have their taxes raised. In an economic environment where no small business should have to endure a tax increase, this debate only serves to demoralize those entrepreneurs who choose to drive themselves to grow. The real issue is not how many, but which of these businesses will get hammered by raising the top two tax rates.
It should be carefully noted by Washington policymakers that the small companies that are likely to be in these top two brackets are the ones that employ nearly a quarter of the nation’s work force, the very firms that are most likely to reduce the nation’s spiraling unemployment rate by rehiring workers and reinvesting in their companies if the economy improves.
But Washington has added still another disincentive for small firms by mandating an unnecessary paperwork chore tucked away in the new health care law. Not only will requiring the submission of IRS Form 1099s for every business-to-business transaction over $600 cost them time and money, but they’ll eventually be called on to help foot the bill for the thousands of Treasury Department tax monitors who will be hired to police this new hassle.
January also could deliver another bit of discouraging news to owners and their families if Washington fails to prevent the resurrection of the 55 percent estate tax - with only a minimal $1 million exemption - a measure that could force heirs to sell their family’s businesses just to meet an outrageous levy on success.