This week is National Small Business Week, sponsored by the U.S. Small Business Administration (SBA). But despite the government’s unwavering support of small businesses on social media, its policy toward them reflects a different sentiment.
In reality, small businesses pay a high tax burden that makes it difficult to survive.
A new graph from the Tax Foundation shows that many sole proprietorships and partnerships must pay a top marginal tax rate of over 50 percent (of combined federal and state taxes). That means half of their profits after a certain point are taken by the government. With these businesses (called “pass-through businesses”) growing rapidly, the tax burden keeps increasing.
That’s no way to treat the businesses that employ half of our private-sector workforce and make up 99.7 percent of employer firms.
Tax Foundation Graph
It’s not even just the cost of the tax itself. Small businesses often have to pay much more in compliance costs, due to the complexity of the system. Rep. Steve Chabot (R-OH), Chairman of the House Small Business Committee, said in a recent article that half of small businesses will pay at least $5,000 to prepare their taxes.
Research by the SBA Office of Advocacy concluded that small businesses are put at a “competitive disadvantage” by compliance costs for taxes and other regulations.
Additionally, Opportunity Lives recently featured an article by Andrew Lundeen of the Tax Foundation. Lundeen analyzed a recent survey by the National Small Business Association and found that almost a quarter of small businesses spend three work weeks of time filling out that taxes, while over half spend more than one work week.
For businesses that are already struggling to compete with the economies of scale of major corporations, this time spent preparing taxes means a greater risk of failure. Already, half of small businesses will fail within five years, according to an SBA report.
A nascent construction company working in the industrial sector aims to grow big by securing big contracts during which they have to compete with multinational giants. The eligibility for applying is hugely estimated on the basis of the assets, liquidity and the tax paid by these companies along with other criteria. The company cannot afford to fall back even once as they see this as the stepping stones to reach higher scales and end up paying more tax than the corresponding slab.
Tax Foundation 2
The estate tax hits small businesses hard too. “The death tax imposes a tax rate as high as 40 percent on family farms, ranches and small businesses, which hurts economic growth by discouraging savings and development,” said Sen. John Thune (R-SD) in a recent op-ed. New health insurance taxes are also detrimental to small businesses.
“In a survey of NFIB members ranking 75 issues of concern for small businesses, tax issues occupy five of the top 10 problems on the list,” said a report on a 2012 National Federation of Independent Businesses survey.
Small business owners understand that taxes are a problem for them. But the government does not. During National Small Business Week, let’s actually advocate for small businesses and find ways to lower their tax burden.