LATELY, BUSINESSES APPEAR to have friends in Washington.
On Tuesday, the Obama administration shelved its plan to raise more than $200 billion in new taxes on companies that operate abroad. Hours later, the Senate Finance Committee approved legislation that would provide subsidies to help small businesses provide health insurance to employees. And now, the administration is weighing a job tax credit aimed at helping companies hire new workers.
“The fact that [the government] is focusing on small business is good,” says Molly Brogan. “Frankly, it’s just smart economics.” Firms with fewer than 500 employees accounted for 64%, or 14.5 million, of the 22.5 million new jobs added between 1993 and the third quarter of 2008, according to the Small Business Administration’s Office of Advocacy in Washington, D.C.
The administration has extended small-business owners some support, including $375 million set aside to temporarily eliminate loan fees and increase the Small Business Administration’s loan guarantee to 90% for 7(a) and 504 loan programs. And many small-business owners say they’re more optimistic about their prospects because of that aid and improvements in the economy. The National Federation of Independent Business’s (NFIB) optimism index climbed 2.1 points to 88.6 in August. Still, owners and advocates say the government could do more.
The government could extend the 90% guarantee, which currently applies to the SBA’s 7(a) and 504 loan programs, Brogan says. That guarantee is expected to fall back to about 75% to 85% — where it stood before the Recovery Act — by the end of November or December, according to the SBA. (Loan fees are expected to come back at the same time.) The programs, which had supported more than $12.6 billion in loans as of last Friday, are largely credited with helping small businesses access loans during the downturn, Brogan says.
There is also a case for keeping President George W. Bush’s tax cuts in place for wealthy individuals. A static rate would also help small-business owners now, says Bill Rys, the tax counsel for the NFIB in Washington, D.C. “A lot of small-business owners pay the individual tax rate,” he says. “We would help them, if that stays low.”
Others suggest cutting the corporate tax rate. Of course, lowering the corporate rate while raising the individual rate might drive a flurry of business owners to incorporate. Daniel Halperin, a law professor at Harvard Law School, suggests a compromise, a split-rate system on profits.
Corporations currently pay the same top tax rate as individuals, 35%. However, corporations also must pay a 15% capital gains tax on the corporate income distributed to shareholders. That combination amounts to a roughly 44.75% tax obligation for corporations, Halperin says. However, once the current tax cuts expire, the top tax rate jumps up to 40%. Rather than charge corporations that higher rate in addition to a 15% tax on distributed dividends, Halperin suggests leveling the playing field: Lower the corporate tax rate to 25% and place an additional 20% tax on distributed dividends. The net effect of the change to the corporate tax structure would amount to a 40% tax obligation, the same as what’s in the cards for individuals.