Everyone involved with government talks about the value of private business owners. In the recent Presidential campaign both Governor Romney and President Obama stated that small business was crucial to the American economy. They both said several times that small business was the engine that creates jobs in this country.
According to the census bureau the 3% that President Obama wants to group with all high earners provides about 30% of all small business jobs. This is a large group that not only provides a significant amount of jobs, but also is the engine of growth for much of the small business world. We need to think about this group of business owners in a different way.
Small businesses of every size are often short on cash. If you own a small business you likely think about taxes in the same vein as payroll. They both are expenses that you need to find cash to pay. You likely have a balancing act that goes on. You need to have cash for running your business, cash for growing you business, and cash that is paid to you as an investor in your business. When your tax rate increases one or all three of these things are impacted.
Profits are created by sales subtracted from all operating costs. Taxes are a major operating cost in the businesses that create the most jobs. If we group our larger small businesses with other high earners under one of the proposed tax plans we reduce the cash these businesses have to grow their businesses.
If this group of businesses has their taxes increase will they grow their businesses as quickly as with no tax increase? I don’t think this is likely. One of the problems any growing business has is how to fund growth. If we increase taxes on the fastest growing companies, they’ll have to slow their growth. It’s just a matter of arithmetic and budgeting.
The challenge is having Congress and the President understand the challenges of small business as compared to high earners. That is unless we are able to find a way to separate private pass through businesses like Sub Chapter S Corporations, LLC’s and Partnerships from other high earners.
The good news is that the Affordable Health Care Act (Obama Care) has shown us the way. For the first time in the tax code, pass through organizations are separated from other high earners. In the Health Care Act high earning pass through companies are exempt from the additional 3.8% Medicare Tax. If Congress and the President follow this strategy for all tax policies we can create needed capital to grow enterprise value and grow the 3% of businesses that create 30% of all small business jobs.
When this group of businesses grows their business they do so with American jobs. The vast majority of these companies don’t offshore jobs or have foreign subsidiaries. This means that when we create more capital by holding taxes steady or even better yet lowering tax rates on this group we really are helping our American economy and American jobs grow. To me, this sounds like rational tax policy. What are your thoughts?
We have put together a Periodic Table of Business Elements. In this chart there are several strategies that small businesses can use to grow the value of their companies. If you’re interested in getting your own copy of our Periodic Table, click on the button below.