Watching the recent US debt limit debacle was quite fascinating. While Republicans seem to oppose any tax increase, at any time, for any reason, hearing the rationale presented by their “experts” on talk news TV was illuminating.
That rationale focused on job creation and, in particular, small business. The engine of job creation is small business. Yet they presented as fact that small businesses were not creating new jobs because of the uncertainty of possible tax increases and the possibility of more administration costs due to “Obama-care.” These pundits were absolutely certain that the population would oppose any small-business tax increase for this reason.
What they didn’t describe with as much certainty was why raising taxes on hedge fund managers making billions of dollars a year would reduce job creation. (That’s a topic for another blog.)
While the Republicans present these assertions as absolutes, they actually offered no evidence to support this particular hypothesis.
At Silver + Goren, we help hundreds of clients develop small business plans to build business value. This includes many cases of expansion, new business development and expanding product lines.
While clients are always concerned about structuring things to pay the smallest amount of taxes legally possible, the actual rate of tax is never discussed. A small business person looking at an opportunity considers the total potential return on their investment and evaluates this against the business risks. In the small business environment, potential return needs to be big to warrant taking on major risks. If the potential return is realistically available, an extra 1% or 5% in income taxes won’t affect the decision.
The largest factor that affects small business plans is availability of capital. In order for a new venture to get started, you need working capital. If this is available through banks or other third-party lenders, getting a business going and hiring new people becomes much easier. While many small owners complain about the rate of interest paid on this capital, in reality the rate is nowhere nearly as significant as access to capital to get new business started in the first place.
A second major factor is access to sufficiently skilled people to work in the business. If the right people aren’t available it becomes difficult to develop a new opportunity.
An issue that does affect small business planning is the cost of government compliance. This can be onerous both financially and in terms of the time required to stay up to date. Many small business owners try to change the way they would normally do business, just to avoid the burden of government compliance.
This is particularly true in the area of employees where payroll burden and reporting costs are substantial. A strategy that many small (and not so small) businesses try to follow is to take people who may otherwise be considered employees and hire them as “contractors.” This scenario has significant risk and can be quite costly if you do it wrong. Stay tuned … I’ll discuss that topic in a blog coming soon.