Why Small Businesses May Be Open to a Tax Increase

Raise some rates and level the playing field to protect essential services.

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David Brodwin is a cofounder and board member of American Sustainable Business Council. Follow him on Twitter at @davidbrodwin.

America's small business owners have begun to speak up on tax reform. It turns out they have a lot to say about our tax structure and its effects. Their message will surprise you, if you think that business owners only want to cut taxes and slash government spending.

Last week, the American Sustainable Business Council and Main Street Alliance released a scientific poll of 515 small business owners across the U.S. These owners run businesses from two to 99 employees. As you might expect, they are whiter, older, and more Republican than the rest of America.

Some Taxes Must Go Up to Build a Sustainable Economy

Small business owners don't like paying taxes any more than the rest of us, but they recognize that tough choices are involved: Cutting taxes means cutting services or taking on even more debt. The majority of owners believe most service cuts – particularly education and defense – have gone far enough. They are ready to close tax loopholes and raise rates to avoid further cuts.

The poll asked owners what should be Congress' top priority with respect to taxes and the budget. By far the largest group (32 percent) said the top priority should be to close loopholes that benefit large corporations. The second largest group called for slightly higher taxes on those earning more than $1 million per year. On the whole, more owners called for some form of tax increase (46 percent) as compared to some form of spending cuts (40 percent.)

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A Pragmatic, Forward-Thinking Perspective

The call to close loophole and raise rates at the high end is based on pragmatism more than compassion for the underdog. Josh Knauer, President and CEO of Rhiza Labs, a Pittsburgh-based software company, put it this way: “All businesses are hurt when we allow tax loopholes for big companies while cutting budgets for public education, research and infrastructure. Tax dollars were a vital component in America's past innovations and infrastructure, fostering economic success. The taxes we pay, wisely invested, are the down payments on our future success.”

Eliminate Tax Loopholes and Subsidies to Level the Tax Playing Field

Small business owners don't like subsidies and protections for any company or industry. They don't want the government picking favorites. They want every company, regardless of its size, to compete in the market on its own merits.

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Most small business owners understand that U.S. based multinationals have the ability to shop around for lower tax rates in other countries, just as they can shift operations between states. Small business owners oppose special quirks and loopholes in the tax law that enable and encourage this kind of tax avoidance. For example:

  • 85 percent of respondents oppose a change in tax law that would allow corporations to permanently defer taxes on income shifted to havens like the Grand Cayman Islands
  • 76 percent of respondents support a change that would base taxes on where sales are made, where employees work, and where physical assets are located. This change would prevent companies from shifting profits to havens where they have nothing but a P.O. Box.
  • 64 percent of respondents support a change that would require U.S. corporations to pay U.S. taxes on all profits, wherever earned, after netting out taxes paid in foreign countries.
  • In part, this perspective represents self-interest: Small business  owners feel they are at a disadvantage relative to U.S. based multinationals that can lower their tax rate well below the nominal rate of 35 percent. "I'm not afraid as a small business to compete with the big boys," said Henry Passapera, co-owner of P&R Trading, an international supplier of airline parts and equipment based in East Rutherford, New Jersey. "But when big corporations use offshore tax havens to avoid their tax responsibility, it puts small businesses like mine at a competitive disadvantage. 

    [Read the U.S. News Debate: Is Obama's Corporate Tax Plan A Good Idea?]

    Surprising Bipartisan Support for Tax Reform

    Across the political spectrum, small business owners showed pragmatic and moderate views that hold the potential for compromise and cooperation. Agreement across parties was strong on key points. For example, support for closing tax loopholes was high among all three groups -- Democrats, Independents and Republicans – and all three groups placed a high priority on protecting education from further cuts.

    Tax Reform for a Sustainable Economy

    We need tax reform, but we need to do it right, and small business owners are pointing us in the right direction. They're telling us that some taxes must go up so we can pay for services that we really need, particularly education. And they're saying we must make the tax system more fair, so companies compete on their own merits, and not on the basis of transnational tax arbitrage. America's small business owners have it right; we need to listen.

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