- The Washington Times - Thursday, June 17, 2010


President Obama recently met with small business owners and their employees at the White House to talk about their economic challenges. In the Rose Garden following his chat, he said that creating the conditions for entrepreneurs to hire and grow has “guided much” of his economic agenda.

This agenda includes various tax credits (he calls them “cuts”) that most small business owners will neither access nor consider because economic conditions and cash flow remain poor. The utility of the health care tax credit, for example, is worthless to most small businesses because of its limited value, complexity and fleeting availability.

For the most part, small business owners are not seeing policies that buoy their confidence or help their firms. Rather, they see a vast expansion of government that has created worry about U.S. economic strength, burdensome regulations and mandates that will add costs, tax hikes that will siphon more of their capital when they need it the most and an array of initiatives that will further squeeze the availability of credit.

With increasing talk of a double-dip recession and the latest jobs data showing anemic growth in the private sector, Mr. Obama needs to focus on growth-oriented policies. It’s not too late to turn away from a growth-sapping agenda that raises costs on business, drains more capital and credit out of the market, and is keeping investment capital on the sidelines or flowing overseas.

A pro-growth agenda starts with putting an end to misguided tax hikes that are moving on Capitol Hill. If the president is truly “standing by” small business as he asserts, he would not remain silent on a series of measures that would rob entrepreneurs of their precious capital.

For example, the foolish move to change the status of carried interest taxation from capital gains to ordinary income hurts the very entrepreneurs who are working to build successful companies and create jobs. This extreme change will lead to less investment, less capital and fewer jobs. The economics are simple: Take away the incentive for long-term investment and there will be less of it.

The same goes for a proposed tax hike on small business owners structured as S corporations. This hefty tax would alter 50 years of established tax policy. It would subject the retained earnings of owners - the single biggest form of capital for small business - to a new 15.3 percent tax. Talk about decimating capital.

In offering an amendment to repeal the provision from the so-called jobs and extenders bill, Maine’s Republican Sen. Olympia Snowe said, “Indeed, this is a job-killing tax hike that will force entrepreneurs across the nation to retrench and reconsider any plans for hiring employees or expanding their business.” Please take note, Mr. President.

A conference committee is now hammering out the differences between the financial reform bills passed by the House and Senate. The legislation is supposed to be about fixing the bad things that caused the financial system meltdown. Yet, Fannie Mae and Freddie Mac - the government-enabled perpetrators of the subprime mortgage mess - are untouched by the legislation. In reality, the effort seems to be more about controlling the financial system (by government, that is) rather than genuine reform. This means bad outcomes for Wall Street and Main Street.

The new bureaus, councils and agencies established by the legislation give the federal government powerful control over the private sector and consumers. For small businesses, such unprecedented government intrusion will alter the wide array of products and financial services they use, which will limit choices, deter innovation and increase the cost of credit.

New regulations foisted upon financial companies, banks and the credit card industry will restrict access to credit and make it more expensive. The possibility of price controls on debit card transaction fees will reverberate economy-wide as all banks and credit unions are forced to rethink whether providing these products makes economic sense. With debit cards being used for consumer purchases, health savings accounts, payroll, per diems, employee incentives, customer rewards initiatives, expense reimbursement programs and more, price controls will have consequences beyond what supporters envision.

Congressional Democrats and the president have made it clear that small business owners should expect a massive tax hike on Jan. 1, 2011, when tax relief provided under President Bush comes to an end. The personal income tax hike will hit many small businesses, and the increase in capital gains and dividend tax rates will negatively affect the cost and availability of capital. In addition, the new health care law includes a series of tax hikes that phase in over the next couple of years which target small businesses.

The poor state of job creation and fragile state of the economy are signs that the president’s policies are not creating the right conditions for entrepreneurs. An approach that allows them to keep more of their capital will restore confidence and jobs. If the president wants to stand by small business, he should tax and regulate them less and he will get much more in return. He needs to believe more in free enterprise and less in big government.

Karen Kerrigan is president of the Small Business & Entrepreneurship Council.

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