More on Small-Business Taxes

I wanted to comment on Jeff Cornwall's post regarding Mark Cuban's proposal to get rid of taxes on businesses with fewer than 25 employees as a way to jump-start the economy. Jeff's post is very enthusiastic about the plan, in some contrast to my more skeptical take.

Cuban's proposal would give us a chance to test out the impact of the Fair Tax. He advocates that small businesses only pay sales taxes. What a great way to prove the power of a simple, non income based tax system.

This is a great point. The sheer amount of taxes that businesses pay is one roadblock for entrepreneurs, but equally harmful is the complexity of the tax code, regardless of the amount taxed. The time it takes to figure out what you owe and which (if any) of the countless loopholes you fall under is staggering. It seems that as long as there is an income tax, there will always be an opportunity for politicians to carve out exemptions to benefit certain groups, at the expense of increasing complexity for those of us filing. If we could get rid of that complexity for a massive chunk of our economy—businesses with under 25 employees—it could demonstrate the benefits of junking an income tax altogether, which I believe is Jeff's point.

I have a word of caution on that point, however. What's stopping an exemption for small businesses from becoming just another loophole itself? Would it really prove the power of a simpler system or just perpetuate the system we have? It's very easy for politicians to say, "We're going to stop taxing small mom and pop businesses" because that's an idea that appeals to everyone. It's a lot harder to jump from that to say we're going to scrap the current tax code.

The WSJ's Independent Street blog has more on small-business taxes.