Couched in the vernacular of equity and transparency, the Obama administration has enacted or proposed policies that divert small businesses’ energy and resources from job creation to bureaucratic compliance. The effect of these policies is to hamstring America’s small businesses through onerous reporting requirements, punitive penalties, and higher taxes. Often touted as the anchor of America’s economy, small businesses have generated 65 percent of the net new jobs created over the past seventeen years.
Globalization has transformed the American economy from an industrial one to an idea-based one. America’s success is now tied to entrepreneurs’ ability to innovate. Given this reality, the Obama administration has done a poor job of fostering job growth, instead choosing to regulate and tax America’s small businesses.
First there was the now infamous 1099 reporting mandate in the health care bill. Under this law, businesses will be forced to issue paper-filed 1099 IRS information reporting forms to any person or company from which they purchase at least $600 in services or goods. This provision requires small business owners to collect tax information from and issue tax forms to the restaurants where they have business meetings, local office supply stores, airlines, rental car companies, and so on. This is the equivalent of raising taxes on small businesses by $17 billion over the next decade.
Equally disconcerting is the impending tax increase on small businesses if Congress does not extend the current rates. Unlike corporations, small businesses usually don’t pay their own taxes; rather, a small business’ profits are included on its owner’s income tax form. In 2008, $457 billion of small businesses’ $631 billion in total profits faced taxation in households that are in the top two income brackets. Thus, a majority of small business profits will face a tax hike if the current tax rates aren’t extended. These small businesses employ a majority of everyone who works for a small business and are responsible for much of the nation’s job growth. Raising taxes on these most successful small businesses will further delay our economic recovery.
The latest piece of legislation set to weigh down small businesses is the House-passed Paycheck Fairness Act, scheduled for a vote in the Senate on Wednesday. The bill looks to close the gap between the amount of money men and women earn by facilitating litigation and burdening small businesses with new paperwork.
Proponents of this legislation have created a false problem by over-exaggerating the pay disparity between men and women. When hours of work, overtime, education, and experience are accounted for, the difference between men and women’s wages is about five cents on the dollar.
This innocuous-sounding bill would require employers to submit data on sex, race, national origin, and earnings to the Equal Employment Opportunity Commission (EEOC). If this database is made public, trial lawyers will be able to comb through every employer’s books searching for instances of pay disparity.
Further stacking the deck against employers accused of gender discrimination, small businesses would be able to justify pay differences between male and female employees exclusively on the grounds of education, training, and experience. While these are important metrics for measuring a worker’s earnings, they do not take into account productivity, drive, and other intangible attributes which undoubtedly play a roll in employee compensation.
Inevitably, small businesses will hire lawyers to ensure compliance with new paperwork and to defend themselves against unwarranted lawsuits. Both of these unintended but very real consequences will starve small businesses of capital when they need it most.
These reporting requirements, tax increases, and new regulations will stop small businesses dead in their tracks. Unable to tell what tomorrow will bring, small businesses will have no choice but to sit on their hands. Reducing potential profits and increasing paperwork will do little to stimulate new businesses, whose success America’s economy depends on.
Pro-growth senators should first oppose the Paycheck Fairness Act and look to solidify the current tax rates — and then rollback unnecessary regulations. Providing certainty to businesses would be the best use of Congress’ time this winter.
Christopher Prandoni is the Executive Director of the Alliance for Worker Freedom, an affiliate of Americans for Tax Reform.