Bloomberg and Obama Misrepresent Tax Hikes on Small Business (Part Two)

(This is Part Two of two. See Small Business for Part One)

My previous post on the issue of taxes and small business focused on the nature of entrepreneurial risk and reward in our system. I do fear there is a tendency to punish success, viewing with suspicion those individuals who create and nurture businesses through rapid growth. Many people assume the worst of financially successful business owners, and that's ironic in a nation built on free market capitalism.

A friend of mine recently commented that entertainers and athletes earning far more than most entrepreneurs seems to be excluded from such suspicions. Apparently, a $20 million film contract is okay, but earn $1 million running a business and we'll attribute the worst motives to you.

President Obama and others have tried to use this public resentment and distrust of successful entrepreneurs by suggesting tax increases on "the rich" won't affect "small business" — because we all love small businesses with their little Main Street shops.

The Heritage Foundation, while far from an impartial source, offers evidence supporting my previous post that arguments that generalize the nature of small business are misleading. The idea that "only" a fraction of small businesses would be ensnared by tax rate increases and other "revenue enhancements" ignores the fact that those affected are precisely the businesses that are the engine of job creation.
Bloomberg and Obama Misrepresent Tax Hikes on Small Business Heritage Foundation
October 10, 2012

…President Obama said that only 3 percent of small businesses would pay higher rates under his plan to increase the top two marginal tax rates. The implication was that job creation wouldn't suffer, because so few businesses would pay higher tax rates under his plan.

Bloomberg… repeated this misleading statistic.
Again, I recommend my previous post [link] on this matter. Only a few members of any group are the best and most successful, regardless of how success is defined. In a free market economy, business success is generally marked by higher income, which in turn allows the hiring of employees and expansion of the business. Only a few, a tiny fraction of all businesses, are successful enough to stumble into higher tax rates.

Business that do find successful ideas tend to grow most within their first five years. Larger corporations also experience spikes in growth, often through acquisition of small explosive-growth companies. Entrepreneurs risk everything, hoping to launch what will either become a larger enterprise or a take-over target for a larger firm.

Most small businesses are not entrepreneurial. It is a common mistake to assume small businesses are focused on growth, but that is not the case. Most small businesses are simply consultants, freelancers, and small family businesses with modest aspirations. The owners of these businesses are important to the economy, but they are not responsible for most job growth.

Jobs are created by aggressive, daring, risk takers with an eye towards explosive growth. Entrepreneurs are rare, and successful enterprises are even rarer. Only about 10 percent of small businesses are entrepreneurial and job creators.

To dismiss a tax increase because it will only affect the companies that are most successful is absurd. Allow me to quote the Heritage response to Bloomberg's editors.
This line of reasoning is a red herring, because the number of small businesses paying the higher rates is irrelevant when it comes to job creation. That's because most small businesses don't hire workers.

Most businesses that are classified as small businesses represent the part-time efforts of their owners or are businesses that don't hire workers. They can range from side jobs such as a person selling items on eBay out of his basement to academics conducting studies or giving lectures to doctors and lawyers practicing their professions on their own.
I wrote much the same thing in my post. What matters is that it growing businesses tend to be small businesses, not that only a few of small businesses fit this description. We should be discussing entrepreneurial small businesses, not small businesses overall — a mistake of logic that seems intentional.
When it comes to how higher taxes on small businesses would impact jobs, it is much more instructive to look at the size of the employer-businesses that would face higher tax rates under Obama's plan.

The Treasury study reports that 1.2 million of those 4.3 million small businesses that employ workers would face higher rates under Obama's tax increase. Those 1.2 million businesses earn 91 percent of all the income earned by the small businesses that employ workers.

In fact, a recent report by the accounting firm Ernst and Young found that Obama's plan would destroy more than 700,000 jobs, because the higher rates he calls for would fall on these biggest, most successful small-business employers that employ 54 percent of the private workforce.
I expect any solution to the "Fiscal Cliff" will slow our anemic economic recovery. Punitive measures towards entrepreneurs, however, will have lasting effects well beyond any tepid recovery. When you discourage risk taking, you discourage the creative engine that powers a free market, capitalist economy.

Larger corporations will be shielded from minor changes to tax policies, but large companies are not known for their ability to exploit creativity and discovery. Kodak, Xerox, and IBM famously owned thousands of patents for brilliant ideas and products. Yet, these companies have always struggled to bring their great ideas to market. In large companies, good ideas struggle against current income streams. For small, entrepreneurial companies, new ideas are all they have to win in the marketplace.

Yes, everyone is going to pay more in taxes for the mess created by generations of fiscal mismanagement in Washington and our state capitals. As I've repeatedly argued, I'd rather see proof of spending restraint before paying higher taxes — I don't trust politicians to curtail spending. However, taxes are going to increase in 2013. The question is, will they punish the very small businesses we need for a real, lasting recovery?


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