Small business and business taxes – Steve Prestegard.com: The Presteblog
This week is National Small Business Week. It’s an opportunity to emphasize the big role small businesses play in the economy and labor market. Small businesses account for half of GDP and half of all jobs. And they create the majority of new jobs and new inventions. I have been fortunate enough to lead several small businesses over my career and witness their outsized importance first-hand.
While we recognize the small business backbone of the economy this week, we should also take a moment to examine the public policies that allow small businesses to thrive in the first place. I am continually amazed that so many people — including politicians and community leaders — believe that small businesses are simply a part of nature — like Lake Michigan — that they aren’t affected by broader economic trends or public policies.
In reality, public policy has a major impact on small business success. Take it from me: Entrepreneurs consider the costs of taxes and regulations before making any decision to hire or expand. For decades, over-taxation had an especially damaging effect on small business creation and expansion, ranking among the biggest hurdles small businesses faced.
Recently passed federal tax cuts have changed that. They created a new 20 percent small business tax deduction — the biggest small business tax cut in the country’s history. Though this aspect of the tax cuts has been overlooked by the media, it arguably has the biggest impact on the economy and the small business dreams of entrepreneurs in Wisconsin and throughout the country. These necessary tax cuts provided me the opportunity to start two Wisconsin businesses: Flags For Schools and eTOP Sports Innovations.
Prior to the tax cut, small businesses faced a top marginal tax rate of 40 percent — not including state and local taxes. At this level of taxation surviving is difficult for many small businesses — let alone thriving. This is reflected in the declining small business creation of recent years — one of the few economic indicators not to recover from the Great Recession.
The new 20 percent tax deduction effectively lowers the top small business tax rate from 40 percent to 30 percent — a 25 percent tax cut. It allows small business owners to protect one-fifth of their earned income from taxes. This capital can instead be used to expand into new product lines, open new locations, hire new employees, and give existing ones raises. No wonder small businesses support the new tax cuts by a margin of ten-to-one, according to a recent national survey.
Given small businesses’ major role in the economy, their benefits are shared by everyone. Less money extorted from Wisconsin small businesses by the IRS means more money stays at home in communities where it is needed. Less taxes means more investment, consumption, and jobs.
The nonpartisan Congressional Budget Office has recognized this tax cut stimulus. It recently raised its growth forecast for the year to 3.3 percent, a level that mainstream economists said couldn’t be achieved. At this level of growth — more than twice the rate of the last year of the Obama Administration — living standards rise noticeably.
This economic growth will create a feedback loop for small businesses, giving them new customers, with more disposable income — something every small business wants. In this sense, the tax cuts are a gift that keeps on giving.
So while we celebrate small businesses this week, we should also reflect on the public policies that go hand-in-hand with their success. These should also be celebrated during National Small Business Week this week.