Small Businesses Speak Out Against Tax System

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March 14, 2005 -- America's tax system hurts small businesses and deters would-be entrepreneurs, researchers and business owners told President Bush's Advisory Panel on Federal Tax Reform Tuesday.

"We have heard two strong messages: compliance costs and predictability," said Connie Mack, the chairman of the 9-person Advisory Panel and former Florida Senator.

Small businesses, said the senator, are disproportionately hurt by the complexity of the current tax system, most notably because of the enormous costs required to comply with the Internal Revenue Services. According to David Hurley, the owner of Landmark Engineering and one of the persons who addressed the panel, a company with $5 million of revenue spends the same on compliance as a company with $2.5 million: roughly $100,000.

According to Hurley, the answer to reducing the cost of compliance lies in simplifying the tax code. One of his suggestions involves using the same filings for both the state and federal Internal Revenue Services.

The current tax system, which changes year-to-year, makes planning business investments difficult. In 2003, for instance, the amount allowed to expense equipment was increased from $24,000 to $100,000; therefore, companies that bought equipment in 2002, but could have waited one more year, did not benefit from the one time expense.

"As soon as you understand the rules in 2004, they change in 2005," said Senator Mack.

Beyond affecting businesses in operation, taxes dictate entrepreneurship, said Donald Bruce, a professor at the University of Tennessee and one of the four persons asked to speak to the Panel.

In a recent study, Bruce found that those who expect their tax rate to fall by starting a business are more likely start a business. On the other hand, when an individual's expected tax rate increases by starting a business, they more often then not will remain in their wage job, thus quelling entrepreneurial activity.

The meeting, held in Tampa, FL, was the third in a series of six. After the scheduled meetings, the Panel will have a hearing on alternative tax plans and then submit their findings to the Treasury Department. Currently, the three most popular plans the committee has heard are a flat income tax, a national sales tax (or consumption tax), and a value-added tax, said Senator Mack.