MONEY

What Entrepreneurs Need From Washington: It's Not Debatable

So far, the debates have painted tax policy as the holy grail for small business. Too bad the facts don't support it.
Bar patrons watch the first US Presidential debate with Republican candidate Mitt Romney and US President Obama at Bullfeathers, a historic bar just feet from the US Capitol.
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Listening to the debates you would think that taxes are the holy grail for entrepreneurs looking to grow their business. Mitt Romney and Paul Ryan cast President Obama’s proposal to let taxes rise on folks making more than $250,000 ($200,000 for individuals) as small business kryptonite.

“Don’t raise taxes on small businesses because they’re our job creators,” said Ryan, who also asserted that increasing the tax rate would hit 53% of small business income. 

That followed Obama-Romney 1.0, when the term “small business” was uttered more than two dozen times, with Romney stating that any tax hike would be a big headwind for small business. 

I find all of this troubling on two accounts. First, the facts. 

If you take the time to unpack who and what is deemed “small business” in all those important wonky papers the candidates cull for their sound bites, you would realize it runs the gamut from a fledgling start-up in the garage to a large S-corporation with hundreds of employees and millions of dollars in income. A report from Congress’ Joint Committee on Taxation found that in 2009 only 0.3% of S corporations had incomes exceeding $50 million, but they accounted for 35% of all S corporation income. 

Another fact that keeps getting lost is that the only small business that would be impacted by the higher tax would need profits above $250,000. Not revenue, but profits. And when you look at it that way, just 3% or so of small businesses will be impacted. One more tax point: It’s only your marginal income above $250,000 that would be taxed at the higher rate. 

But my bigger issue is why taxes are center stage at all. For starters, it’s insulting. Entrepreneurs don’t dream, build, and grow because of tax policy. I have yet to hear an entrepreneur say “Gee, I am going to launch a business, and build it to take advantage of capital gains.” What sort of sorry mission statement is that? 

Entrepreneurs don’t need to hear about tax policy. We--and all businesses--need to hear a debate about economic growth policy. According to the Center on Budget and Policy Priorities, job growth emanating from small business was twice as strong in the 1990s, when the top income tax rate was 39.6%, as it was from 2001-2007 when the top rate was 35%. 

How could that be? Because we had strong economic growth in the 1990s, not an addled economy struggling to get out of first gear, as we face today. We weren’t staring at massive deficits. And we did not have the level of Congressional dysfunctionality that last year subjected us to the debt-ceiling debacle and this year is delivering up what could be a very ugly handling of the fiscal cliff issues. 

What Entrepreneurs Want

This past summer the National Federation of Independent Business released a survey of what’s gnawing at small business owners most.  The survey is conducted once every four years, and has respondents rank more than 70 factors. This year two new concerns were tossed into the mix: Uncertainty over Economic Conditions and Uncertainty over Government Actions. They ranked #2 and #4, respectively. Federal Taxes on Business Income ranked #6, down from #3 in 2008. And State Taxes on Business Income fell from #7 to #10. (For the record, in the 25-year span of the NFIB survey, Cost of Health insurance has always been the #1 concern.)

Message to Washington: What entrepreneurs care about is the roiling uncertainty. More. Than. Taxes. 

Corporate America is sitting on record amounts of cash, rather than reinvest it in their business through hiring or capital expenditures. Plenty of consumers are doing the same, fearful of spending today because who knows what is around the next economic corner. Sad to say, that makes plenty of sense in this environment, where we are in suspended animation waiting to see how things play out in Washington and whether the economy can avoid another stall out. 

What small business needs are more customers. More demand. That doesn’t come from tax policy. It comes from a stronger economy. How we get to that is a topic I’d love to be seriously debated.

IMAGE: PAUL J. RICHARDS/AFP/GettyImages
Last updated: Oct 16, 2012

BILL HARRIS | Columnist | CEO, Personal Capital

Bill Harris, CEO of Personal Capital, was formerly CEO of PayPal and also Intuit, the makers of Quicken, QuickBooks and TurboTax. He founded numerous financial technology and security companies, and served on the boards of RSA Security, Macromedia, SuccessFactors, GoDaddy and EarthLink.

The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.



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