A Washington accountant once proposed that small business proprietorships, partnerships, and corporations all be taxed on the same basis -- as "small business enterprises." I introduced this idea at a meeting of tax lawyers ostensibly studying simplification of the code. "Too big a shock to the whole tax system," was their response. I don't agree.
The "accordian" or "expanding" tax code is another way to simplify the system. The code would be organized according to size of income -- the smaller an individual's business, the fewer the provisions that would apply. The first 100 pages of the code would apply to everyone, the next section to those whose income was more than $100,000, and so on through the entire code.
To provide incentives for business growth, we might consider giving a taxpayer, whether an individual or a corporation, a credit every year for the first $100,000 lent to small business in that year. This would expand the pool of long-term credit and offset such attractions as liquidity, that large public companies are able to offer to lenders.
To those "free enterprise" proponents to whom this idea is repugnant, there is only one answer. Remove from the code the extraordinary number of credits that benefit large companies, and small companies will be perfectly content to compete in the marketplace without off-setting benefits.
Organized small business has historically been much better at fighting off tax threats than in achieving positive benefits from the tax system. It has, for instance, just spent months winning -- for the moment -- a critical fight with the IRS over the issue of taxing closely held corporations.
Thirteen years ago, Congress asked the IRS to help it deal with the problem of the insider-stockholder or owner-manager who puts money into a closely held corporation. Congress feared that these transactions, while they could easily be made to look like loans, would really be investments of capital. By calling them loans, however, the owner-manager could take money out of the business in the form of interest, which is not taxable to the business when paid, instead of in dividends, which are taxable when paid.
The IRS has tried to come up with a regulation to deal with this possible abuse. It finally drew up more than 40 painfully reasoned pages. Making a loan to your own company -- or even pulling in outside venture capital, under some circumstances -- would be so complicated, with this new regulation, that the amount of credit and capital going to small companies would be greatly diminished. It also might be years before an IRS audit resulted in the imposition of tax, and the payment of back taxes and penalties might be onerous for a company and the lender at that point.
It took a major national campaign spearheaded by Small Business United, the National Association of SBICs, and the National Venture Capital Association to get the IRS to withdraw this regulation. Protracted fights like this one drain small business leaders of the resources they need to make affirmative gains. Yet these critical victories are little noticed or understood by most small businesspeople.
But while the commonsense rebellion is under way, small business ought to be able to win some positive legislative victories. My nomination for the most useful small business goal is still a general job tax credit (see INC., January, page 16). The country is beginning to understand how crucial small business will be for creating jobs in the 1980s and '90s. Retooling for greater productivity and achieving full employment should be the nation's highest priority.
The targeted job credit currently on the books goes to a company whenever it employs someone classified as hard to hire. The new general job credit would be granted to a company for every new employee it took on, regardless of that person's socioeconomic status. At the same time, the company could receive a double credit whenever it employed someone in the former hard-to-hire category.
To reduce revenue loss to the government and to concentrate all benefits fairly in new and small firms, there would be a limit on the number of jobs eligible for credit in any one company. Any revenue loss would be more than made up by reductions in welfare and unemployment benefits and by taxes paid by the newly hired. At worst, revenue to the government would be briefly deferred; at best the credit would pay new tax dividends and spur job creation.
This credit might balance the investment tax credits and the leaseback and accelerated depreciation provisions that currently benefit large companies. And it would be at least as effective as those have been in providing economic stimulus.
A few years ago a general job credit was authorized. Tragically, Treasury persuaded Congress to cut it back to the targeted credit. Had a general credit been implemented then, we would now have in place a noninflationary tool with which to fight the recession's cruelest consequence -- joblessness.
Congress should now move as quickly as it can on this. We still may have time to use a general job tax credit to help lift us out of recession or to quicken and strengthen a recovery. Passage of this proposal will not only help small business, it will also improve the health of the entire economy.
