The Plight of Small Business in America
This week has brought a big political backlash against President Obama for saying, “If you’ve got a business, you didn’t build that.” The President should have chosen his words more wisely and small business owners have every right to be upset about this comment. No one from the government has risked everything and worked tirelessly to help make their business a success. In fact, the government causes most of the problems for businesses. Yet, the President is calling for a higher tax contribution from small business owners to support the bloated government.
It’s not Easy Running a Business
I have had a couple of small businesses, starting in 1990. These were side businesses, where I didn’t make a lot of money or have a lot of overhead. But, I still had to get a business license, pay taxes and keep books. For every hour I worked and got paid, I had another 20 minutes of unpaid work to bill customers and comply with the government. It has been a great experience and I enjoy being an entrepreneur. But, I have a great day job and don’t need to depend on the income from my business. Others need that income desperately.
Entire industries have been devastated since 2008 and small businesses have absorbed most of the hit. The housing and construction industries virtually disappeared for a couple of years and are barely starting to trickle back. Real estate and mortgage brokers, most of whom are independent business owners, also took a big hit. Many auto dealerships closed, when people stopped buying cars and trucks. Millions have lost their jobs as these businesses failed.
Are Higher Taxes Fair?
Anyone who has owned a small business knows more tax write offs are available than for regular employees. They also know the self-employment tax is very high, because they have to pay both the employer and employee positions of Medicare, Unemployment, Disability and Social Security. This can add up to a 40% tax rate on their net profits. They also have to pay very high prices for health insurance and they may not be able to write it off.
Meanwhile, many large corporations make billions of dollars, received government stimulus or bailouts and pay very little federal income tax. The President isn’t on TV asking them to pay their fair share. He is targeting the small businesses and working professionals, who have no lobbyists or political clout. Small business owners already pay a big share of the taxes and create most of the new jobs. Large corporations are sitting on huge piles of cash, getting government contracts and special tax credits, while hiring very few new workers. I believe it’s the large corporations that should be asked to pay their fair share of income taxes.
The Bottom Line
The bottom line is that small businesses are the engines that drive our economic growth. Some entrepreneur or small business owner is going to create the next Apple, Google or Facebook. The government will make this as difficult as possible and then show up with their hand out, asking for taxes and campaign contributions.
“We have to get away from the class warfare and recognize that we are growing jobs by helping small business.”
Norm Coleman – U.S. Senator (R-MN, 2003-2009)
Recommended Reading
Balance Junkie – Observations of a Financial Tourist
Beating the Index – My Fixed or Variable Mortgage Rate Decision
DINKS Finance – 7 Tips to Help You Save Money when Starting a Business
This post was featured on the Carnival of Personal Finance over at Sweating the Big Stuff. If you aren’t familiar with the Carnival of Personal Finance, you need to check it out. It’s the best place on the web to get your financial advice.
I think it’s way too difficult to get started. In California, simply creating an LLC is $800 and takes forever!
I think some people take advantage of the fact that everyone thinks small businesses deserve help. Just because a small business deserves help doesn’t mean that a large businesses deserves the same benefits.
Daniel,
Thanks again for hosting the Carnival of Personal Finance and for including this post.
A lot of companies are incorporating in Nevada or Delaware, instead of California. Not only is the $800 corporation fee too high, there is way too much red tape. It’s not a business-friendly state.
I don’t believe small businesses need help nearly as much as they need the government to let them conduct business. There are dozens of overlapping agencies regulating a single Mom & Pop business. Most of these agencies have their own fees and regulations, which change every year. Plus, there are three separate tax agencies, all of which are very aggressive. It is out of control.
As for large businesses, I saw an interesting chart on their effective tax rate and it was an eye opener. The corporate tax rates are very high and have not changed. But, the effective tax rates (actual taxes paid) for large corporations has dropped a lot in the past couple of years. It’s obvious they are getting a lot of special credits and deductions and they aren’t paying their fair share of the taxes.
I agree entirely with this. The government heaps down layer upon layer of regulation and restriction upon small businesses, while rewarding larger companies with a bigger moat, lobbying and protections. This is utter and complete bullshit, and far from a free market. A real free market would be more entrepreneurial and have more smaller companies, without all of this lobbying waste, favouritism, and increased burden on smaller players.
Hey Kevin,
I agree with you on the government sponsored moat. From the music industry, to utilities, to automakers, to aviation, to professional sports, there are laws, regulators and anti-trust exclusions specifically protecting these monopolies. It’s not fair to customers or competitors. It increases costs and stiffles innovation.
Unless we reform campaign finance and the tax code, I see it getting much worse in the future.
I agree with you. It is too bad that small businesses are facing hardships all around the globe, when they are the ones who stimulates the economy most of the time.
Thanks for stopping by Claire.
I just read that 200,000 small businesses closed in America between 2008 and 2010, taking away 3 million jobs. If we want those jobs and businesses back, we need to make it easier to conduct business.
You had me up until you suggested corporations need to pay their fair share, Bret.
I think they already do pay their fair share; the trouble is government has a spending problem — not a revenue problem.
Len,
We definitely have a spending problem, but a revenue problem as well. I am surprised you weren’t aware of the dramatic plunge in corporate income taxes collected. Right now, corporations only pay around 8% of the total revenue. Many large corporations pay zero or very little in Federal income taxes. Stay tuned for my next post, where I break it down.
Business will not get its name without the customers.
So it would be great if you have genuine customer interactions and honest service.
Thanks for stopping by Marnie.
Honest or even polite customer service is hard to come by these days. Most companies care very little about their customers. They only care about maximizing their profits. This is especially true for companies with monopolies, such as utilities.
Despite a few somewhat positive developments in past employment gains and projected hiring, there was an increase—from 40 percent up to 45 percent—of small-business owners who do not believe there will be any growth opportunities in the coming year. The overwhelming majority of small-business owners (88 percent) expect a flat or recessionary economy in the coming year, and the number of small businesses expecting a recession more than doubled in the last six months.The engine of employment growth is, at best, stalled. There’s a growing likelihood it could go in reverse. Brilliant content..!!!
KYD
Thanks KD.
I tend to trust small business owners a lot more than government economists for predicting the future business climate. After all, they have been conducting business for a long time and their livelihood depends on it. They talk to their customers frequently and know who is planning to buy and how much. Government statistics are skewed so badly for political purposes they are almost worthless as an indicator.
This is actually a much needed content keeping the present scenario in mind. Small businesses owners gamble on the future every day. They are constantly reviewing the market, products, economy, cost of doing business, regulations and taxes. Everything is evaluated. Sustained business growth requires a certain amount of stability. And Government is simply not providing the stability needed to allow small business to create new jobs and wealth. Right now, our economic future is unstable. The out-of-control spending and the increasing national debt are causing too many companies to hunker down and do nothing. According to the National Federation of Independent Businesses, 72% of small business owners would like to add employees, but uncertainty and poor sales prevent job creation. Isn’t that exactly what the majority of us are doing in our own households; trying to conserve cash, working longer hours, increasing productivity or basically doing without? We’re all riding out the uncertain economic storm hoping for better days ahead.
Jennifer Goldblum