Mitt Romney and Obama always say:
I want to lower the tax rates for small businesses so they can keep more of their money and hire more people.
I think there is something very wrong with this statement on more than one level.
First we need to decide what he means by small businesses. There are railroads with less than 1,500 employees that are considered small businesses.
But really, it’s the mom and pop grocery, the sole proprietor web designer, the photography studio on Main Street that are really small businesses. Businesses with 9 employees or less make up 95% of small businesses according to the most current U.S. census data. The non-employer companies, entrepreneurs or freelancers, with no employees at all, make up more than 78% of all businesses.
When politicians talk about “small businesses” to the general public, most of who have never operated any business at all, this promise of lowering tax rates for small businesses so they hire more people just pulls the wool over the eyes of the public.:
Oooh, aaah, the great presidential candidate knows so much about stuff we have no idea about. Yes, let’s lower taxes.
I quit my last job as an employee in 1989, became a consultant and was a non-employer company of one person for two years. Then I hired two or three people. Then five more. Now our little small business ranges between 25 employees and just under 50 employees at its highest time, with annual revenues of $4 million to $6 million, depending on the economy. With that background I consider myself a small business man with 23 years of experience. I think I know something about small businesses.
And here is the shocker:
Never in those 23 years have I paid attention to the tax rate and never has the tax rate had any impact whatsoever on hiring decisions. NOT ONE TIME. So, from my own experience as a small business, I need to say that Romney and Obama are way off base with his statement.
The fact is:
Small businesses like mine, who want to grow to hopefully become large businesses, pump all the profits they make back into the business to grow. They often don’t make money, show no profit, and pay no income taxes at all.
Such businesses also often bring in investors, friends, family, angels, venture capitalists, who put money into the company to help them grow, which again very often leads to no profits at all, sometimes even many years of losses. Such losses accumulate, and those businesses have a “tax loss carry forward” which is not available in California but in many other states, and it’s a federal rule. Due to that, many such growing businesses pay no federal income tax during the growing years.
Yet, those businesses grow, create jobs, employ people, buy equipment and services and fuel the economy.
Another fact is:
The reviled stimulus actually has created 10 to 20 jobs over more than three years in our company due to several orders that resulted at least partly from stimulus money. The stimulus worked for us.
We create jobs when we get new orders. We get new orders because we have great products or excellent service. So we need more people to provide more of those services and build more of those products.
Orders – or economic activity – create our jobs.
The tax rate has never once even come into my thinking when I was working on creating jobs.
I like low taxes, don’t get me wrong. But stop making people who know nothing about small business believe that low tax rates cause entrepreneurs to hire more people.
You can put my tax rate to zero – heck, you can make it negative and PAY ME, and it still won’t by itself create a single job.
2 thoughts on “Small Business and Taxes”
Politicians use this tax argument because that is really the only tool the Federal government has (besides the Federal Reserve toying with the interest rates) to have any impact on the economy at all. I agree it is virtually meaningless but the other tools are even less effective. In fact, the government doesn’t have a large role in a capitalist society to affect growth. The stimuli packages that Bush and Obama implemented averted a near certain disaster but these are unsustainable methods and were underfunded at the time because the move is so counter-intuitive to the general public.
As a global experiment though it is interesting to view the European plan vs. the American plan for growth. The American plan by far was more successful (keep taxes low/stimulus pkgs/quantitative easing) than the European model (raising taxes/austerity measures on underperforming economies). I still don’t think at this stage we can declare victory though. There is still too much uncertainty.
Excellent comment, Bill. Right on.