Wednesday, July 22, 2009

Small Business Squarely in the Government's Crosshairs

The Obama Administration and it's policies have the business community squarely in it's cross hairs and is moving in for the kill. Proposed taxes on energy, increased taxes on businesses to pay for expanding health care coverage, and the rising cost of complying with ever more regulation are serving to choke off profits and restrict growth at the very time our country needs them the most.

Policy makers across the nation choose not to understand a very basic yet simple truth, the more difficult the government makes it for an employer to earn a profit, by confiscating profits through taxation and increasing expenses through regulation, the fewer profitable employers there will be. By extension, corporate and personal income tax revenues will be lower, as will the growth in employment. Thus, government spending on welfare and unemployment must be higher. This seems like pretty basic stuff, don't you think?

Even the economist they love to quote when they want to increase government spending understood this.

Nor should the argument seem strange that taxation may be so high as to defeat its object, and that, given sufficient time to gather the fruits, a reduction of taxation will run a better chance than an increase of balancing the budget.” John Maynard Keynes


Sadly it is the rare Politician who understands the quote above. Raising tax rates to raise tax revenue, and passing regulations that restrain the capacity of entrepreneurs is ultimately the disappointing folly of fools, for it never produces the desired results. When you reduce incentives you restrict growth. When you limit economic growth, you lessen opportunity and eliminate prosperity.

The bell curve also applies to folks who run small businesses, not just college entrance exam scores. Only a relative few business owners are near genius at organizing and running profitable companies. Most of the rest are spread out across the balance of the curve. It's these business owners, at the margin, who are hit hardest by increases in taxation and the cost of more government regulations. They run businesses where profit margins can be razor thin, even in good times. The one other critically important thing that needs to be remembered is that they are the job growth engine of the economy.

A business only grows when the principals responsible for the decision to expand or not conclude that the risks of a proposed expansion are outweighed by the potential for increased profits. When they conclude otherwise, businesses don't expand and jobs are not created. Yet it is these very business owners who find themselves under attack and in the administration's cross hairs. We hear it over and over again from the President and his advisers in a never ending chorus: "We'll take it from the rich," "We will only tax those earning over $250,000 per year because they can afford it." “They need to pay their fair share.” The large majority of these folks are small business owners.

We have heard this all before and tried it with disastrous results, but evidently congressional memories are short. I remember the luxury surtax on boats which came into effect in the early 90's; it too was supposed to raise additional revenue for the government. It would do so by soaking rich boat buyers who could afford to pay the surtax, billions in tax revenue would be made available for the Washington pols, or so the theory went. Did it work ? No, it seems the rich opted not to be taxed more and they stopped buying boats from American manufacturers. The American boat building industry was crushed, and it's hard working employees were forced into unemployment lines. I'm sure that wasn't the intent of the do gooders who passed the legislation. But it was the result, and as always the folks at the margin were the ones who felt the pain of the government's misguided attempts to “soak the rich.”

What politicians fail to understand is that the rich who work hard to earn their wealth in the first place will rightly work just as hard to protect it. The governments new found infatuation with income redistribution, which they hope to accomplish by once again “soaking the rich” will only serve to dig our nation deeper into the hole of diminishing revenues and increased spending on transfer payments.

Business owners will keep their powder dry, delaying their expansion plans until the misguided policies of this administration are replaced by the wisdom of the electorate in the voting booth. The American people instinctively know that the massive increase in government spending accompanied by a reduction in the incentives for productive work and economic expansion is a recipe for disaster soup.

2 comments:

Brian T. Chase said...

A-freeking-men.

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