Tax Policy – Sub-Optimal for Small Companies


Source: Julianna Davies

 

Small businesses face all kinds of problems that portend their ultimate failure — most of them, however are in their control. Tax policies, on the other hand, stem from the government — and today those policies are quite literally hampering the ability for entrepreneurial ventures to significantly stimulate the economy. Juliana Davies anecdotally describes the issue below, and highlights what some experts have to say about it.

 

Current tax policy makes it difficult for small businesses to operate, which is negatively affecting the rest of the economy. Small businesses drive employment, as a whole, and create new markets and opportunities. They are the primary innovators in the business sector. Thus, instead of stimulating the economy as it has done in the past – through tax breaks for consumers – the U.S. government should try lessening the financial load on small businesses.

 

The economic climate makes it difficult for investors to earn money, businesses to turn profits, and individuals to find gainful employment. Unemployment is the most significant concern of these, because it is directly related to poverty and a country’s stability. Currently, the unemployment rate is above 8%, and economists fear that this situation could persist or worsen. Nobel Laureate Michael Spence wrote for Project Syndicate warned: “If Europe deteriorates, or there is gridlock in dealing with America’s “fiscal cliff” at the beginning of 2013 (when tax cuts expire and automatic spending cuts kick in), a major downturn will become far more likely.”

 

As theory has it, small businesses have the potential to unlock the economy from recession. According to Bloomberg, small businesses comprise 99.7% of employers in the United States. While this figure does not mean that small businesses employ 99.7% of the workforce, it does demonstrate the remarkable potential of this category to add jobs, produce more value, and keep the unemployment rate low.

 

In the same article, author Jay Fishman points out that small businesses are at a disadvantage, which could easily be removed. He suggests that small businesses be given a 3-year ‘incubation period,’ in which they would not be required to pay taxes. In support of his theory, Fishman points out that the states that have the lowest taxes on small businesses also have the lowest unemployment rates in the country. These are Texas, Wyoming, and North/South Dakota.

 

Because filing taxes can be complicated and expensive on its own, this policy would eliminate a lot of bureaucratic red tape. New enterprises would be able to devote their effort (and money) to other, more lucrative projects. A lot of this money could easily be reinvested in hiring additional employees, which would lower the unemployment rate.

 

In the meantime, however, small businesses are required to buckle down and face the U.S. tax system. For many entrepreneurs, the process can be extremely harrowing. Many even try to avoid it, altogether, in the hopes that they will one day have the money laying around to invest in an accountant. This tactic exemplifies the wrong way to decrease operating costs, because it ends up costing the business more in the long run. Unfiled tax returns incur additional costs from the IRS, and when the IRS files a tax return for a business, it does so without triggering any tax breaks. Instead, small business owners can reduce operating costs, often, by hiring professionals. Consultants and accountants both incur upfront expenses but often reduce operating costs, overall. In time, new legislation may give new companies a break on paper shuffling, but that time has not yet come.

 

Julianna Davies writes for http://www.mbaonline.com, a website for students interested in school or business in general.

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