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Quit Helping Small Business
“Small business” and the absurdity of subsidizing it—a serious issue arising from Joe the Plumber.
“Fifty percent of small business income taxes are paid by small business.”
— Senator John McCain, during the third presidential debate, October 15
I have been diligently researching this matter, in the hope of winning a Nobel Prize in Economics, and my preliminary conclusion is that the situation is even more extreme than John McCain suggests. Although I really should run this past Paul Krugman before going public, the evidence seems to suggest that as much as 100 percent of small business income taxes are paid by small business. Of course, both candidates seem to believe it is a scandal that the owners of small businesses pay any taxes at all, and from the way Barack Obama and McCain talk, they soon won’t have to, no matter which man gets elected.
Small businesses do "create" a disproportionate number of jobs. They also "destroy" a disproportionate number—generally by going out of business.
Look. Small businesses are businesses like any other, and small business owners are people just like others—except that they tend to be wealthier. Why should the magic words “small business” entitle them to pay lower taxes? When this subject comes up, McCain tends to lose his patience and say, “Why would you want to increase anyone's taxes right now?"—meaning in the midst of a worldwide financial crisis, although he was equally opposed to increasing anyone's taxes before anyone saw the crisis coming. But the question is: If we are going to make any vestigial effort to pay the nation's bills—or even if we are just going to give up and start handing out tax cuts—why do owners of small businesses deserve special treatment?
There is an anthropomorphic fallacy here. Big businesses are not owned by big people, and small businesses aren't necessarily owned by small people. The typical shareholder in a big business is a worker in some other big business whose pension fund has chosen to invest in that company. Or a retiree who has bought this stock as his or her nest egg. Or it's somebody's 401(k). The typical small business owner might be poor and struggling or might be prosperous. He or she might have many employees, thus creating jobs, or might be a professional solo practitioner such as a lawyer or accountant or doctor who employs no one but him- or herself (and, if they can get away with it, as many do, a couple of family members). The important point is that if our small business owner is struggling to survive, then he or she is not earning $250,000 a year and won't be affected by Obama's "spread it around" tax increase on incomes above that amount. That $250,000 a year is the owner's net income, obviously, and not on the business's gross revenue. And if small business owners are successful enough that they can take $250,000 or more out of the business in a year, why shouldn't they be treated just like anyone else who earns that amount? Maybe a "spread it around" tax is a terrible idea, but the fact that it hits a lot of small business owners is neither here nor there.
But wait. Aren't small businesses at the heart of our risk-taking, job-creating culture, and isn't this something we wish to encourage? Not exactly. Small businesses do "create" a disproportionate number of jobs. They also "destroy" a disproportionate number—generally by going out of business. The small business sector of the economy is just inherently less stable. That's neither bad nor good. It just is.
There is no need to encourage risk-taking entrepreneurship with special tax breaks. Risk takers will take risks, and if the risks work out they shouldn't mind paying the same level of taxes as everyone else. If the risks don't work out, they won't have to. Does McCain think the government is better than the free market at choosing which kinds of companies are likely to flower? (Obama probably does think so, but he certainly would not want to admit as much at this point.) There used to be a term for this: industrial policy. It was generally decided that it is not a good idea. Now industrial policy is back with a vengeance in the banking industry, but that is considered to be a matter of necessity. Special tax breaks for small businesses are not a necessity.
Actually, Obama is the guiltier party here. McCain talks a lot (and a lot of nonsense) about small business, but that's in support of policies, such as tax cuts for the rich, which are terrible ideas in their own terms, but at least they don't single out small business for special treatment. Obama, by contrast, proposes exempting the sale of small businesses from the capital gains tax, allowing small businesses to avoid the burdens his health care plan would place on big businesses, and so on.
Instead, Obama ought to concentrate on finding the other 50 percent of small business income taxes—the part McCain has revealed that small businesses aren't paying.
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aperturemad
Whatever salient points you attempt in the body of this piece are completely undermined by the weirdly bitchy snipes at Krugman.
And the point of that is ...?
Opsimath44
MK, typically love your work, but the weird Krugman joke was undecipherable.
jtnsr159
Small businesses are businesses like any other, and small business owners are people just like others-except that they tend to be wealthier. Why should the magic words "small business" entitle them to pay lower taxes?
The answer- they take risk. They risk their own money to start a business, and if it fails, it is their money that goes down the drain. The gov't isn't there to bail them out.
That is why their taxes should be lower. they hire people and create new jobs. We need small business in this country.
mjdoran1979
I loved your Krugman comment. As a small business ownere I never paid 50% of my required taxes and always paid the 100%. I suppose as you put it most of us are in business in some way or another. We might own a piece of a business and not have any required participation. Then you have small businesses that require complete participation from the owner. With the perks and expenses the owner can deduct he is given enough opportunity to avoid paying taxes. Once he gets to the bottom line he's really only paying a portion of his real earnings.
Like you I believe we should all be responsible for paying taxes. I think cutting taxes is totally irresponsible considering the condition of our country. I do not believe that any stimulus package is of any value to the public as it depletes and weakens our economic state.
I do believe there are better ways to "fix" our economy. I have an idea that could work.
Enough said.
Mike Doran
Clankazoid
Years ago George McGovern bought a piece of a New England resort and experienced first hand all that was involved with a small business. After the experience, which ended not so well, he said he wished he'd known years before more about what it was like to be a small business owner; it would have made him a better Senator. May we assume you've never started or owned a small business ?
Government mandates from tax collecting to immigration patrol to insurance providing to pension providing to tax paying, etc. ( you know what I mean if you've ever owned a small business ) are onerous and expensive and ruinous on occasion. They take away from the real business of providing a product or service to customers. There should be less of them, not more.
Try starting a store sometime and see what I mean.
rickste11
You can forget about a nobel prize. S-corps are taxed on the net
even when no money is taken out. Most of the net that is left over after taxes is used to expand the company.
Shabster
I'm very conservative. I rarely agree with Mr. Kinsley's thoughts. However, he's very good at making his case - so good, that it can be frustrating for me. Therefore, I find his columns interesting.
I'm a small businessman. I dislike paying taxes. Yet, I fully agree with his thoughts on how small business' shouldn't get special tax breaks.
My problem with the column and most of the comments is that nobody suggests lowering spending. The people have got to accept substantial cuts in programs. America simply can't afford to continue spending so much money.
I can't believe that the federal budget deficits are the result of too little revenues. The federal tax receipts are massive. MASSIVE!
Have the federal government be realistic by cutting it's spending to match its receipts. That's what most people and business' have to do.
Thanks,
Shabster.
CharlieT
First, businesses are not taxpayers. They are tax collectors for whom taxes are a cost of doing business passed on to customers, ie, you and me.
Second, because we have unduly high corporate taxes (2nd in the world), many small businesses have attempted to lower taxes by filing as sole proprietorships at a great increase in personal risk. Almost three-fourths of those affected by Obama's tax-the-rich scheme are in fact small businesses.
Not only do higher taxes add a cost to operations that competes with the cost of maintaining employees, it makes our business's products less competitive in the export market as well as less affordable to us (as we cover the cost of the taxes levied--sales taxes are added on, but a larger amount is hidden in the price of goods and services to cover other taxes).
Furthermore, studies have shown (Al Shapero, for one) that a high percentage of small businesses in any market serves to buffer the market from downswings. Far from shedding jobs disproportionately to large businesses, they soak up the out-of-work. When Joe gets laid off at the plant, he gets a job at cousin Bill's bowling alley or auto repair shop, IF Bill can afford to hire him, which he may not if deep thinkers like Kinsley and McCain and, especially, Obama have sway.
flippmb
Why should any businesses, small or large, pay income tax? Any tax paid by a business is ultimately passed on to the consumer. The result is a hidden tax that most consumers never realize is coming from their own pockets.
It's not as if the profits automatically go into the pockets of the owners or shareholders. However, if the profits are pocketed, the owner must, of course, pay personal income tax (on top of the income tax already paid by the business). The only purpose in taxing the business is so that politicians can hide just how much the average American really pays in taxes.
Most of us have no idea how much we are indirectly paying to the government and our politicians are shielded from accountability for a large portion of the tax burden.
mityaZ
Perhaps your reference to Krugman shows why you're so ignorant about economics. If you cannot understand how lower taxes on small business is a good thing for everybody, you're either hopeless or willingly ignorant due to ideological rigidity.
apachedave
You know, if I started a small business , my objective would not be making enough money so I can work harder while risking my own ceridt and capital, it would be to get WEALTHY and RICH. Otherwise, why would you even start one and risk your own money and credit?
Just read this loser's words on "Why should the magic words "small business" entitle them to pay lower taxes?" This Crossfire reject socialist doesn't get it, or maybe he really does, if he is following Karl Marx. Just another example of an Ivy League elitist that is not successful, and thinks he should be because he "think's" he is more intelligent and should be compensated as such, and has to find a way to take it from someone else that takes risks.
mmmarks
My goodness! The readers who object to Kinsley's reference to Krugman in his first paragraph have clearly misunderstood that Kinsley is being ironic--at the expense of McCain, whose quoted statement at the head of the column is utter nonsense! Just read the McCain quote and the first paragraph again, folks, and you will get the joke.
I love this column. Thank you, Michael Kinsley!
RRWineGuy
"Small business" is almost as meaningless as "Family Farm". There are not many Small sizes of either any more, and, regardless, why should I support your venture if your product can not compete in the marketplace. (ADM is not a Small Family Farm, either!)
dave-j
You need to make a distinction between growth-oriented small businesses and static ones. Growing ones create jobs. Their owners are not necessarily wealthy, they try to increase the value of their equity and the company generates little profit (and little or no taxes on revenue) and a growing number of jobs. Static small business (e.g., a corner grocery) can have wealthier owners, but don't grow the employment base.
The average salary of an entrepreneur is solidly middle class, despite the perception of many.
stevetravel04
As an evil, wealthy, small business owner I don't want better treatment just fair treatment. 3 months of the year for the government and no more - from everybody. If Barak wants to raise my taxes to 50% - I'll just not work as hard - I'm not my neighbor's slave.
If I want to donate to good causes I will but neither my neighbor, nor Barak have the right to choose the good causes for me. Of, course their causes always help support leftism and more taking. That's just b.s.
Thank you.
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