Every so often this country witnesses a burst of creative citizenship. Ordinary folks, fed up with their leaders' solutions for the nation's woes, insist on trying their own. I call this a "commonsense" rebellion -- and, if my travel impressions are accurate, one is brewing today.
The conditions that triggered this widespread discontent are obvious -- inflation followed by recession, record unemployment, a projected 1983 federal deficit of more than $100 billion. The people are bored by arguments about which party is to blame. They are tired of "curing" inflation by plunging the country into recession and easing recession by renewing inflation.
They are tired, in short, of political parties that seem dominated by different forms of imprudence. The Tweedledumbs cater to one group of special interests and insist on spending too much. The Tweedledopes cater to another group and can't bring themselves to tax enough. And the people are finally saying, "enough."
To the Democrats they say, "Don't try to spend our way out of a recession with government money"; to the Republicans, "We're glad you're bringing inflation under control to the extent that you are. But the price is too high, and the way it's paid is unfair. Common sense tells us there must be a better way to level the peaks and valleys in the economy."
In the past, small business has often been in the forefront of popular movements for change. It led the national demand for a balanced budget; it first sounded the call for limiting the size of government and making expansion of the private sector a national goal. But this does not mean that commonsense rebellions are guaranteed to help small companies. Sometimes, in fact, small business has wound up the unwitting victim of movements it has itself led.
Nowhere is this more true than in matters of tax policy. Small businesspeople have lacked the sophistication, technical skills, and clear strategic goals that would have ensured the passage of tax legislation favorable to their interests. The 1981 Economic Recovery Tax Act provides one good example. Small business leaders played a key role in getting this bill passed. (President Reagan later explicitly thanked them for it.) Nonetheless, overall the legislation has helped individual taxpayers and large companies far more than it has helped small business.
Before ERTA's passage, the effect of the graduated federal corporate income tax helped offset the greater relative burden that regressive payroll taxes put on small companies. Trus, lobbyists for large companies had become remarkably skillful in punching holes in the Internal Revenue Code for their clients, primarily in the form of tax credits. And, in time, many of the nation's large companies were paying taxes at an effective rate below small companies. But ERTA added accelerated depreciation and leaseback provisions to the investment tax and other credits. And now many large companies may end up avoiding the corporate income tax entirely.
ERTA was supposed to expand capital investment. So far it hasn't, and the nation as a whole has not reaped the hoped-for rewards from its passage. Small business did realize some gains -- for example, the provision that increased the amount of property that can be passed on to heirs without estate taxes. There is the risk, however, that ERTA will make tax rates paid by small companies compare even less favorably than in the past with those paid by big companies. This in turn will make these firms even less attractive to equity investors and long-term lenders than they previously were. At the very least, we need a tax code that does not make the position of small business worse.
At best, we need a wholly new tax strategy. This strategy must ensure that a new code be as simple as possible, since small businesspeople lack the time and the resources to deal with unneeded complexity. Second, it must ensure fairness of tax burden vis-a-vis large companies and nonbusiness taxpayers. And finally, new tax policies should provide incentives for new business formation and small business growth. We should keep these goals in mind when evaluating any new tax proposals, such as the minimum tax or the flat tax.
The minimum tax, advocated by President Reagan and Sen. Robert Dole (R-Kans.), would set a 15% floor on corporate taxes -- and would apply to any company whose total tax liability fell below 15% of corporate income. This minimum would eliminate the possibilities for very little or no tax liability that large companies now have under ERTA. The proposal seems fair and responsible, yet small business, as always, must worry about whether a provision like this one, aimed primarily at large companies, might back-fire and increase the burden on smaller companies. Conceivably, a 15% minimum tax could result in more small companies paying more dollars to the government than big companies would.
The flat tax would drop most or all of those murderously complicated exemptions, deductions, and credits in the Tax Code and replace them with one across-the-board rate applied indiscriminately to everyone. This move is designed to simplify taxes. While it is primarily intended to apply to individuals, the proposal has great significance for small businesses, since so many of these are sole proprietorships. A flat tax should make it possible to lower the rate at which income is taxed, while broadening the income stream to which the tax is applied.
This proposal sounds great -- as long as small business doesn't inadvertently lose the few essential tax advantages it now has. Small business leaders need to study this proposal carefully before jumping on the bandwagon. They've been romanced before into giving up barrels of flour for a few biscuits.
The disturbing subject of what to do about tax evasion is also receiving a great deal of interest. In the past eight years, the amount of tax cheating has risen sharply. In my view, this increase is to some extent a judgment made by citizens on the entire tax system. Yes, we need better enforcement and compliance. But we also need to understand that the government has made it nearly impossible for ordinary mortals to cope with tax liability. The mass of regulations and interpretations in the code can benefit only large companies and wealthy individuals who can afford costly professional advice. Throwing the same legal morass at small businesses is neither fair nor sensible.
