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Taxes: Chipping Away at Prosperity

December 26, 2013

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When asked to identify the “Most Important Problem Facing Your Business Today” over the last 40 years in the National Federation of Independent Business survey of its 350,000 member firms, the steady winner was “taxes” followed by “cost of regulations and red tape.” The all-time vote recipient was “inflation,” another form of taxation that reduces the purchasing power of incomes and firm revenues. The second place all-time winner was “credit and interest rates” during Volcker’s reign at the Fed. But the steady winner is “taxes,” followed by “regulations and red tape.” Although NFIB only surveys U.S. small business owners, these findings likely reflect the circumstances of entrepreneurs globally. The big firms co-opt the government while small firms enjoy no such benefits.

Taxes are the direct confiscation by the government of profits, the major source of new capital to finance the growth of the business (no “twitter capital” here from faceless investors). Regulations force owners to spend their money on mandated activities, just another tax. And, the “red tape” – the most important asset a small business has is the time of the entrepreneur, “taxed” by the need to spend valuable time filling out an ever growing pile of paperwork and record-keeping demands. Regulations are spewing out of Washington at a record pace (one every two or three hours), impossible to keep track of, to comply with. One entrepreneur recently observed that it really is impossible to start a firm without a payroll service to make sure all the rules are complied with. A very sad commentary on what government is doing to our costs and incentives.

Few can file their tax returns without help as well. Why is that necessary? Why do taxes have to be complicated? The nation spends an estimated 7 billion hours filling out tax forms each year. A growing number must hire professional help, another “tax” on the business owner and the firm’s resources. In a special NFIB study of business problems (“Problems and Priorities,” available at www.nfib.org/research), out of 75 separate problems, federal taxes took sixth, seventh and eighth places on the problem list. The three problems cited were the loss of capital due to taxes, the complexity of the tax code and frequent changes in the tax code.

Another tax being pushed is the minimum wage which will compel owners to pay more for the same labor, a tax on the resources of the firm. This increase will be passed on to customers by competitive necessity. Because the minimum wage is the base on which unions set their skill differentials, this will “bubble through” the wage sector. Raising the minimum will raise costs and prices, but most importantly, it reduces forever job opportunities for the less skilled and the young. Neighborhood stores that employ, say, 10 minimum wage workers for 2,000 hours of work each per year will see labor costs rise by $20,000 for every dollar increase in the minimum. The much discussed $15 minimum would add about $150,000 to labor costs (plus FICA, state taxes etc.). That’s not chump change.

Obamacare is loaded with taxes disguised as “penalties” in addition to taxes on medical equipment and probably other surprises. There are also taxes on capital gains and increased taxes on the incomes of a few business owners lucky enough to have made it “into range” of the tax rules.

Few of us really know how much of our income is taken by taxes, so many of them are buried in the prices of goods and services we buy like gas taxes, sales taxes, use taxes, new airline ticket taxes and phone taxes. But the really important ones are those we see and respond to like taxes on work or investing that we try to avoid by doing less of the thing being taxed. The President believes we need more tax revenue to finance government spending. He thinks the way to get that revenue is to raise tax rates on those who work and invest. But the best way to is get the economy moving again.

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