Tax Policy Should Consider New Business, Not Small Business

By :: April 8th, 2013

Small businesses occupy an iconic place in the public policy debate and benefit from a broad range of tax and spending subsidies. But the economic issues surrounding small businesses and innovation are complex and nuanced, and not well understood.  We are learning, however, that  if Congress wants to encourage risk-taking, it may be better off focusing on new firms, not small ones.

In an effort to better understand the nature of small businesses and the government subsidies that support them, my Brookings colleague Sam Brown and I have reviewed decades of research  in a new paper for the Kauffman Foundation. What we’ve found suggests Congress should tread very carefully as it thinks about  how the tax code drives decisions by entrepreneurs  to start and expand companies.

Being small, in and of itself, does not confer a special advantage to businesses in job creation or innovation. Rather it is young firms, which by definition start as small businesses, that serve these critical roles. Policies that aim to stimulate young and innovative firms may be very different than those that subsidize small businesses.  

Sometimes, the very tax policies and other public programs that are aimed at helping small businesses may discourage their growth. For instance, when pro-small business subsidies or policies are phased out as firm size expands, they may unintentionally discourage businesses from expanding because expansion will lead to loss of those subsidies.

The tax treatment of small business, innovation and entrepreneurship will continue to be a front-line issue in tax reform.  For instance, House Ways & Means Committee Chairman Dave Camp (R-MI) has proposed a package of potential changes in the way small business and other firms whose owners report their business income on their 1040s are taxed.

These reforms deserve a careful review. But Sam and I found that there is often a vast gap between the rhetoric that surrounds the tax treatment of small business and the reality.

37Comments

  1. Ralph H  ::  3:25 pm on April 8th, 2013:

    I think you (being a policy wonk) miss a few critical points about small business. We are the people who risk money and time to do the managerial jobs that “professionals” and government managers don’t want to or could not do. We disproporionately hire the under educated and compete in less glamorous areas like plumbing, machine shops, resturants, awn service, Dunkin Doughnuts, auto repair, and convenience stores. Yet we are subject to most of the same rules that the big boys are. We pay significant percentage of our income on accounting, rule complience and insurance. We can be shut down by the Feds or state agencies, or sued into bankruptcy. Even local doctors are fleeing private practice to work for hospitals and large groups.

    We do not have the cash to buy favorable legislation. Much of what used to be middle america is collecting disability or flipping burgers because the small manufacturing firms were driven out of business by globalization. Meanwhile the current president’s favorite “clean” energy and high tech groups enjoy subsidies and the ability to shelter 90+% of their earnings.

    If you objectively look, I believe you will find that small business pays a higher overall tax rate than most fortune 500 companies do, and the overwhelming amount of government “breaks” go to the large firms. I suggest you randomly interview some local small business owners.

  2. AMTbuff  ::  7:08 pm on April 8th, 2013:

    Compliance costs as a fraction of revenue are higher for small businesses. So are most overhead costs. To the extent that government creates these costs it should attempt to offset them somehow. Tax policy is arguably the best available tool for this purpose.

  3. Hobart Locksmith  ::  10:20 pm on April 8th, 2013:

    I comment each time I especially enjoy a post on a website or I have something to valuable to contribute to the discussion.
    Usually it’s caused by the passion displayed in the article I browsed. And after this post TaxVox

  4. Is-Small-Business-or-Are-New-Companies-the-Engine-of-Job-Growth-in-the-US?  ::  10:36 pm on April 8th, 2013:

    […] Policy Center challenges that assumption, Small Business, Innovation, and Tax Policy: A Review (h/t TaxVox).  Instead, it might be young and innovative firms that drive job growth, and perhaps tax law […]

  5. Tax Roundup, 4/9/2013: We assume it is so, and that makes it so. « Roth & Company, P.C  ::  8:30 am on April 9th, 2013:

    […] William Gale, Tax Policy Should Consider New Business, Not Small Business (TaxVox) […]

  6. Frank  ::  12:41 pm on April 9th, 2013:

    I could not refrain from commenting. Very well written!

    My web-site – Frank

  7. Michael Bindner  ::  10:10 pm on April 9th, 2013:

    Hopefully we can get a tax reform that turns “small business” consultants into statutory employees. There is a great deal of abuse in this area. Likewise, small businesses that run franchise operations are often dodges to unionization. Reversing this would be helpful for workers and would likely benefit the owners in the long run. We all know about small Wall Street firms who are simply holding companies for hedges and much larger firms. Giving them breaks is unconscionable. Hopefully, the chairman will take all of this into consideration.

  8. Michael Bindner  ::  10:18 pm on April 9th, 2013:

    If we shifted to consumption taxes, individual tax filing for some small businesses would go away (and be business filings instead). Employees, however, would no longer file.

  9. vitamin shopppe coupon  ::  7:24 pm on July 2nd, 2013:

    Like others, the prenatals were also major for me
    to swallow as well as the large volume of iron in them created me
    quite ill. So, at my doctor’s request, I took 2 Flinstones every single day and 1 slow-release iron pill. It worked for me!

  10. baseball radar guns  ::  7:21 am on July 3rd, 2013:

    It’s amazing to pay a quick visit this website and reading the views of all colleagues regarding this paragraph, while I am also keen of getting knowledge.

  11. Rosemary  ::  10:56 am on July 26th, 2013:

    It’s very simple to find out any matter on web as compared to textbooks, as I found this paragraph at this web page.

    Look at my blog … pet vacuum – Rosemary

  12. bright starts bouncer  ::  7:22 am on July 28th, 2013:

    It’s truly a nice and helpful piece of information. I am glad that you just shared this useful information with us. Please keep us up to date like this. Thanks for sharing.

    Here is my homepage – bright starts bouncer

  13. Bailey  ::  3:29 pm on August 6th, 2013:

    I’m gone to say to my little brother, that he should also go to see this webpage on regular basis to get updated from newest information.

    Here is my homepage: dewalt cordless *Bailey*

  14. Aurora  ::  11:03 am on August 7th, 2013:

    I’ve learn several good stuff here. Certainly value bookmarking for revisiting. I surprise how a lot effort you place to make any such great informative website.

    Here is my page; whey gold standard (Aurora)

  15. Marilynn  ::  5:32 am on August 30th, 2013:

    I just switched my domain name to godaddy. I almost cried on the phone when the agent I got
    at godaddy understood how to help me. I had spent
    4 hours getting hung up in when trying to contact ipage and then talking
    to idiots. They are RIDICULOUS.

  16. Harold H. Groesbeck  ::  12:32 pm on November 30th, 2013:

    I was pretty pleased to discover this website. I need to to thank you for ones time due to this wonderful read!!
    I definitely loved every bit of it and I have you saved as a favorite to see new
    information in your website.

  17. c710 2847 11.6  ::  1:45 pm on May 1st, 2014:

    c710 2847 11.6

    TaxVox » Blog Archive » Tax Policy Should Consider New Business, Not Small Business

  18. bnasoft.com  ::  12:04 am on May 13th, 2014:

    bnasoft.com

    TaxVox » Blog Archive » Tax Policy Should Consider New Business, Not Small Business

  19. マタニティ  ::  1:35 am on May 14th, 2014:

    マタニティ

    TaxVox » Blog Archive » Tax Policy Should Consider New Business, Not Small Business

  20. カラコンファンキーホイップ激安  ::  10:59 pm on May 14th, 2014:

    カラコンファンキーホイップ激安

    TaxVox » Blog Archive » Tax Policy Should Consider New Business, Not Small Business

  21. http://boy40hen.modwedding.com  ::  1:12 am on May 16th, 2014:

    When it comes to baby cribs, most parents will need to choose the top for the youngster.
    Meal time is something tricky having a baby and to allow it to be easier,
    you can find booster seats and high chairs for your child’s needs.

    When it comes to baby cribs, most parents will need to choose the top for the youngster.
    Meal time is something tricky having a baby and to allow it to be
    easier, you can find booster seats and high chairs
    for your child’s needs.

    More than parroting correct answers, students eventually figure out how to retrofit outlines
    styles every now after which. Someone else may find the harder to detect grammatical errors
    which you let read your writing. sears outlet faces (http://boy40hen.modwedding.com)
    It is irrelevant if you might be writing for promotional purposes, website content, in order to post in your blog.
    If they charge by the word or even the page, say to them what your
    ceiling is and ask them to contact you before exceeding
    that limit.

  22. 1年使用カラコン  ::  10:49 am on May 19th, 2014:

    1年使用カラコン

    TaxVox » Blog Archive » Tax Policy Should Consider New Business, Not Small Business

  23. http://pinescharter.net/UserProfile/tabid/42/userId/13190/Default.aspx  ::  11:42 pm on June 6th, 2014:

    cheap gaming laptops where to find them

  24. i-am-bored.com  ::  12:49 am on June 11th, 2014:

    i-am-bored.com

    TaxVox » Blog Archive Tax Policy Should Consider New Business, Not Small Business » TaxVox

  25. link  ::  4:40 am on June 12th, 2014:

    Hi there, You’ve done a great job. I will definitely digg it and personally suggest to my friends.
    I’m sure they’ll be benefited from this web site.

  26. make  ::  4:59 pm on June 14th, 2014:

    surefire cree upgrade

  27. spring airsoft  ::  9:39 pm on July 21st, 2014:

    If you woսld like to increase your experience just keep visiting this web page and be uupdated wih the newest news update posted here.

    Feel free to νisit my website – spring airsoft

  28. airsoft m16  ::  6:08 pm on September 29th, 2014:

    Thans a bunch ffor sharing this with all folks you actually realize what you are speaking about!

    Bookmarked. Kindly lso sesk advice from my site =).
    We can have a link change contract among us

  29. airsoft atlanta  ::  8:24 pm on September 29th, 2014:

    Hey I know this is off topic but I was wondering
    if you knew of any widgets I could add to my blog that automatically tweet my newest twitter updates.
    I’ve been looking for a plug-in like this for quite some time and was hoping
    maybe you would have some experience with something like this.
    Please let me know if you run into anything.
    I truly enjoy reading your blog and I look forward to your new updates.

  30. survival food  ::  4:11 am on October 1st, 2014:

    Thank youu for some other fantastic article. Whhere else may anybody get that kind of information in such a perfect way
    of writing? I’ve a presentation subsequent week, and I am on the search for such info.

  31. Julieta  ::  2:13 am on October 2nd, 2014:

    What’s Happening i am new to this, I stumbled upon this I have found It absolutely useful and it has helped me out loads.
    I aam hoping to give a contribution & aid different users lke its aided me.

    Great job.

  32. halloween candy  ::  3:46 am on October 2nd, 2014:

    Magnificent goods from you, man. I’ve take into account your stuff prior to
    and you’re just extremely excellent. I actually like what you’ve
    bought here, reall like what you are stating and the best way wherein you assert it.
    You’re making it enjoyable and you continue to take care of too keep it sensible.
    I cant wait to read much more from you. That is actually a great web site.

  33. redwolf airsoft  ::  11:40 pm on October 2nd, 2014:

    I was wondering if you ever considered changing the structure of yoyr site?
    Its vry well written; I love what youve got to
    say. But maybe you could a little more in the way of content
    so pepple could connect with it better. Youve got an awful lot of text
    foor only having 1 or two pictures. Maybe you could space it out better?

  34. fudge  ::  12:24 pm on October 4th, 2014:

    Hey There. I found your blog using msn. This iss a really well
    written article. I’ll make sure to bookmark it
    and return to read more of your useful information. Thanks
    for the post. I’ll certainly return.

  35. Allison  ::  1:09 am on October 6th, 2014:

    No matter if some one searches for his vital thing, thus he/she needs to be available that in detail,
    so that thing is maintained over here.

  36. fine wine  ::  1:30 am on October 12th, 2014:

    Hi there! This blog post couldn’t be written any better!
    Reading through this post reminds mee of my previous roommate!
    He continually kept talking about this. I’ll send this
    information to him. Preyty sure he’s going tto have a good read.
    Many thanks for sharing!

  37. cheap airsoft  ::  9:34 pm on November 5th, 2014:

    There is definately a lot to know about this subject. I love all of the points you made.