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Posts Tagged ‘Small Business’

All things considered, I like small businesses more than big businesses.

Not because I’m against large companies, per se, but rather because big businesses often use their political influence to seek unearned and undeserved wealth. If you don’t believe me, just look at the big corporations lobbying for bad policies such as the Export-Import Bank, Dodd-Frank, Obamacare, bailouts, and the green-energy scam.

It’s almost as if cronyism is a business model.

By contrast, the only bad policy associated with modest-sized firms is the Small Business Administration. And I suspect the majority of little firms wouldn’t even notice or care if that silly bit of intervention was shut down.

Rather than seeking handouts, small businesses generally are more focused on fighting back against excessive government.

That’s because taxes and red tape can be a death sentence for a mom-and-pop firm. Literally, not just figuratively.

The Daily News reports on the sad closing of popular restaurant in New York City.

For 25 years, China Fun was renowned…the restaurant’s sudden Jan. 3 closing, blamed by management on suffocating government demands. …“The state and municipal governments, with their punishing rules and regulations, seems to believe that we should be their cash machine to pay for all that ails us in society.” …Albert Wu, whose parents Dorothea and Felix owned the eatery, said the endless paperwork and constant regulation that forced the shutdown accumulated over the years. …Wu cited one regulation where the restaurant was required to provide an on-site break room for workers despite its limited space. And he blamed the amount of paperwork now required — an increasingly difficult task for a non-chain businesses. “In a one-restaurant operation like ours, you’re spending more time on paperwork than you are trying to run your business,” he griped. Increases in the minimum wage, health insurance and insurance added to a list of 10 issues provided by Wu. “And I haven’t even gone into the Health Department rules and regulations,” he added. …“For smaller businesses like China Fun, each little thing that occurs makes it harder,” said Malpass. “Each regulation, each tax — you put it all together and it’s just a hostile business environment.”

This is rather unfortunate, but perhaps it is a “teachable moment.”

There are two things that came to mind as I read this story.

  • First, at some point a camel’s back is broken by too much straw. Politicians often claim that a particular tax or regulation imposes a very small burden. Perhaps that is true, but when you have dozens of taxes and hundreds of regulations, those various and sundry small burdens become very onerous. I’ve made the point before that you don’t need perfect policy for the economy to function. You just need “breathing room.” Well, China Fun ran out of breathing room. A casualty of big government, though it remains to be seen if anyone learns from this experience.
  • Second, complicated taxes and regulations are a much bigger burden for small companies compared to big corporations. Every large firm has teams of lawyers and accountants to deal with tax and regulatory compliance. That’s expensive and inefficient, of course, but such costs nonetheless consume only a very small fraction of total revenue. For small businesses, by contrast, those costs consume an enormous percentage of time, energy, and resources for owners. For all intents and purposes, bad government policy creates a competitive advantage for big firms over small firms.

The moral of the story is that we should have smaller government. Not just lower taxes (and simpler taxes), but also less regulation and red tape.

Not just because such policies are good for overall economic performance, but also because small businesses shouldn’t be disadvantaged.

P.S. Since we’re on the topic of how government tilts the playing field in favor of big companies (at least the corrupt big companies), let’s enjoy some humor on that topic.

Starting with Uncle Sam’s universal bailout application form. And we also have the fancy new vehicle from Government Motors.

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I made a serious point the other day about how government plays a very important role in the lives of entrepreneurs.

But since I was talking about the staggering burden of red tape and regulation, I wasn’t being very supportive of the President’s assertion that government deserves a big chunk of the credit when a business is successful.

This cartoon makes the same point, but adds taxation to the mix.

As far as I recall (I sound like a politician under oath when I write something like that), this is the first Branco cartoon I’ve used, but I think it’s the best one in this post, so I’m looking forward to more of his (her?) work.

Regular readers know about Michael Ramirez, of course, and he has an amusing take on the you-didn’t-build-that controversy.

I’ve used lots of Ramirez cartoons over the past few years, and you can enjoy some of his work here, here, here, here, here, here, here, here, herehereherehereherehere, and here.

The Obama campaign has been complaining that the President’s words were misinterpreted, so this Eric Allie cartoon is quite amusing and appropriate.

You can laugh at more Allie cartoons here, here, here, and here.

Fortunately for Obama, he has some allies to help him out, as Lisa Benson reminds us.

More funny Lisa Benson cartoons can be seen here, here, herehere, here, here, herehere, and here.

Last but not least, we have another Allie cartoon. I think this is the first time I’ve used two cartoons by the same person, but I think you’ll agree they’re worth sharing.

This gives me an opportunity to end on a serious note. The Obama campaign is asserting that the President was simply stating that private sector prosperity is made possible by the provision of “public goods” such as roads and bridges.

This is a perfectly fair point, as I explain in this video about the Rahn Curve.

But what Obama conveniently overlooks is that spending on so-called public goods is only about 10 percent of the federal budget. The vast majority of government spending is for unambiguously harmful outlays on transfers, consumption, and entitlements.

Which is why the second Allie cartoon is so good. Even when government does something that is theoretically good, it causes a lot of collateral damage because of the excessive size and scope of the welfare state.

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As this image illustrates, the internal revenue code is a nightmare of complexity.

And this chart shows how Obamacare is turning the health care system into a Byzantine nightmare.

So what happens when you mix bad tax policy and bad health care policy? Well, you get this chart, which shows the maze that small business owners must navigate in order to comply with a new Obamacare tax credit.

Maybe this cartoon was right after all.

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I’m not serious , of course, but it is rather ironic that Raul Castro is cutting the tax burden on small business at the same time that Obama is pushing for higher tax rates on small business. Reuters reports on the latest in supply-side communism.

Cuba unveiled on Friday a new tax code it said was friendlier for small business, signaling authorities are serious about building a larger private sector within the state-dominated economy. The new system, outlined in the Communist Party daily Granma, greatly increases tax deductions… The tax redesign comes as the government has begun slashing 500,000 workers from state payrolls and preparing to issue 250,000 self-employment licenses to create new jobs in President Raul Castro’s biggest reform since taking office in 2008. …The new tax system enables the self-employed to deduct up to 40 percent from income for the cost of supplies, compared to just 10 percent under the old one. Formerly, small businesses simply paid a graduated income tax. Now they will also have to pay a 10 percent sales tax and 25 percent social security tax, but both are deductible at the end of the year.

Unfortunately, Obama seems to views tax issues through the prism of class warfare. This video explains why class warfare tax policy is misguided, and it includes the footage from the 2008 campaign where Obama basically said that he didn’t care whether his proposed tax increase on capital gains led to lower revenue.

The politics of hate-and-envy may be emotionally satisfying to some on the left, but there is strong evidence that high tax rates damage small business. And even though Obama apparently doesn’t think this means much, there is also lots of evidence that the so-called rich won’t wind up paying much additional tax because they can easily adjust their behavior. I guess the real question is why so many statists are consumed by disdain and resentment.

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Kevin Hassett and Alan VIard of the American Enterprise Institute have a column in the Wall Street Journal showing how Obama’s proposed tax hikes will impose significant harm on small business owners and other entrepreneurs. Higher tax rates are damaging for the obvious reason that business cash flow gets diverted to the IRS, but also because they alter the price (or tradeoff) between work and leisure and between consumption and investment. This means less productive activity, which is just another way of saying reduced national income. 
Vice President Joe Biden harshly rejected House Minority Leader John Boehner’s assertion that the hikes would harm small businesses, saying that “he has created this myth that a tax cut for millionaires is actually a tax cut for small business. There aren’t 3% of small businesses in America that would qualify for that tax cut.” House Speaker Nancy Pelosi flipped the number around, saying that the planned tax increases would exempt “98% of American families and about 97% of small businesses.” …The 3% figure, which is computed from IRS data, is based on simply counting the number of returns with any pass-through business income. So, if somebody makes a little money selling products on eBay and reports that income on Schedule C of their tax return, they are counted as a small business. The fact that there are millions of people in the lower tax brackets with small amounts of business income may be interesting for some purposes, but it is irrelevant for the assessment of the economic impact of the tax hikes. The numbers are clear. According to IRS data, fully 48% of the net income of sole proprietorships, partnerships, and S corporations reported on tax returns went to households with incomes above $200,000 in 2007. That’s the number to look at, not the 3%. …A pair of papers by economists Robert Carroll, Douglas Holtz-Eakin, Harvey Rosen and Mark Rider that were published in 1998 and 2000 by the National Bureau of Economic Research analyzed tax return data and uncovered high responsiveness of sole proprietors’ business activity to tax rates. Their estimates imply that increasing the top rate to 40.8% from 35% (an official rate of 39.6% plus another 1.2 percentage points from the restoration of a stealth provision that phases out deductions), as in Mr. Obama’s plan, would reduce gross receipts by more than 7% for sole proprietors subject to the higher rate. These results imply a similar effect on proprietors’ investment expenditures. A paper published by R. Glenn Hubbard of Columbia University and William M. Gentry of Williams College in the American Economic Review in 2000 also found that increasing progressivity of the tax code discourages entrepreneurs from starting new businesses.

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