Small Business Too Big To Fail Too

Earlier this week, the House unveiled an $825 billion economic stimulus package designed to defibrillate a flatlining economy. There appears to be something in it for everyone, except where it really matters – small business. And while the plan calls for some “tax relief” for business in the form of tax refunds for companies posting losses, the relief will do little to nothing to get the wheels of the economy rolling again.

During his campaign, Obama effectively out-Reaganed the “conservative” in the race by essentially positioning himself as the champion of the Middle Class and small business much the way Reagan did in 1980 – by promising to hold the line on spending, while cutting taxes to stimulate growth.

Of course, once the curtain was pulled aside these tax “cuts” turned out to be nothing more than tax credit/federal welfare gimmickry that would do little to nothing to spur corporate investment. Worse yet, the Democrat-controlled Congress and President-elect Obama are calling for increased spending on social programs, mandated health care coverage and needless workplace regulation in the form of card check legislation that will more than likely hamstring an already-strained business environment.

Consider these statistics on small business released by the federal government:

- Small businesses comprise 99.7% of all employer firms in the US;
- They employ over half of all private sector workers;
- Small businesses generated 60%-80% of all net new jobs between 1996-2006;
- Small firms pay 45% of the total US private payroll, and create half of the non-farm private gross domestic product;
- Nearly 40% of small businesses are owned by women; 15% by minorities
- Almost 90 percent of American businesses are family owned or controlled, ranging in size from two-person partnerships to Fortune 500 firms.

So when it comes time to getting the most bang for your buck, wouldn’t it make sense to start here?

One of the unique aspects of the US tax structure is that it allows most small businesses to circumvent corporate income tax by allowing income to “flow through” to the owners who then report it on their individual income tax returns. According to the US Treasury, roughly 35% of business taxes are paid in this manner by the owners of "flow-through" businesses—sole proprietorships, partnerships and S corporations. The Bush tax cuts of 2001 and 2003 reduced the individual tax rate from 39.5% to 34%, which in turn provided for a period of over 48 months of uninterrupted economic expansion in the wake of the tech bubble and 9/11.

This makes the top individual tax rates – you know, the “rich” – crucial because a disproportionate share of the flow-through income reported by small business owners is taxed at those rates. Among the small share of tax returns that are subject to the top two tax rates, most receive small business income. The Treasury also reports that approximately half of the revenue raised from rolling back the reduction in the top two tax rates enacted during the Bush tax cuts of 2001 and 2003 can be attributed directly to flow-through income.

And this is precisely why Obama’s stimulus will not only not have the effect he intends, but his promise to let the Bush tax cuts expire at the end of 2010 will reverse any positive economic gains that happen to occur between now and then. At this stage of our economy, this is a huge gamble.

If Obama can’t deliver on his promises to stimulate the economy and opts instead to weigh down small business with punitive taxation, unnecessary regulation and mandates, Republicans will have found a rallying cry for 2010 and beyond….Obama pried. Small Business died.