Small Business Getting the Screws

While President Obama attempts to frame the lapse of the "Bush tax cuts" in 2013 as a supposed return to the norm--with plenty of help from the media, who have accepted the premise that the extension of current tax rates are actually revenue "losses" should they be "extended"--he also recognizes that it would be political suicide to let that happen in toto. So he has come up with a plan to "extend" the "Bush tax cuts" another year for individuals making less than $200,000 and businesses making less than $250,000. According to the President, anyone making more will be taxed at the rate "we were paying under Bill Clinton." Not quite according to the Wall Street Journal:

[President Obama] ignores his ObamaCare tax increase of 0.9% on top of the current 2.9% Medicare tax, plus a new 2.9% surcharge on investment income, including interest income.

That's an additional 3.8% surcharge on investment income, and added to the Bush expirations would take the capital gains rate to 23.8% from 15% today, and the dividend tax rate to about 45% from 15%. In Mr. Obama's economic world, tax cuts for middle-class "consumption" are good, but low rates to spur saving and investment are bad. This makes no sense because consumption is ultimately the product of saving and investment.

How does this affect small business?

The President dismissed all of this as merely affecting 3% of small business owners. But that includes tens of thousands of the most productive, fastest-growing small businesses—those most likely to hire workers amid a national jobless rate of 8.2%.

Congress's Joint Tax Committee—not a conservative outfit—estimates that in 2013 about 940,000 taxpayers will have enough business income to meet Mr. Obama's tax increase threshold. And of the roughly $1.3 trillion in net business income, about 53% will get hit with the higher tax rates.

This is because millions of businesses report their income as sole proprietors and subchapter S corporations that file under the individual tax code. So Mr. Obama wants these businesses to pay higher tax rates than the giant likes of General Electric or J.P. Morgan. Does that qualify as "tax fairness"?

No, but the President--and the Federal Government--aren't as friendly to small business as they'd all like us to believe and it's nothing new, as the U.S. Small Business Administration reports:

The federal government last year fell short of its “small business” contracting goals for the eleventh straight year, a streak that stretches back to the first year of the George W. Bush administration. Federal agencies awarded contracts worth $91.5 billion to small companies in fiscal year 2011, equal to 21.7% of all prime government contract dollars awarded. Despite ongoing efforts to boost small business contracting, 2011 saw a drop of 6.5% from the 2010 total of $97.9 billion, which represented 22.7% of prime contract dollars. With a goal of 23%, however, the government came up short in both years, according to data released by the Small Business Administration (SBA).

The government also failed to hit its contracting goals for businesses owned by women or service-disabled veterans, as well as for those located in traditionally underserved and underemployed regions of the country.

Couple the above with the way regulations are stacked against small-businesses, as Jay Carney explains in his analysis of a new policy paper arguing against corporatism (and for truly free markets) by Matt Mitchell, senior research fellow at George Mason University's Mercatus Center:

Politically favored businesses of course benefit from direct subsidies (think agribusiness) and government loan guarantees (think Solyndra and Boeing), but Mitchell makes the important point that regulation itself creates a privileged class.

Regulation often acts directly or indirectly as a barrier to entry. The conservative and libertarian media have documented this anecdotally -- Philip Morris supported and is benefiting from Obama's tobacco regulation, for instance, because the rules allow it to lock in its dominant market share.

This is not an idea held by just free-market think tanks, either. Carney continues:

For instance, liberal activists Ralph Nader and Mark Green wrote in the Yale Law Journal that the "regulatory system undermines competition and entrenches monopoly at the public's expense." Mitchell in this section also cites Alan Krueger, who now heads Obama's Council of Economic Advisers.

In the Obama era, as Democrats and the media try to paint deregulation as some sort of dangerous sop to big business, Mitchell's notion of "regulatory privilege" is a crucial tool for dismantling the old narrative that regulation protects the public. Mitchell uses a colorful image to make his case: Bruce Yandle's "bootleggers and Baptists."

Illegal booze smugglers, Yandle wrote, "support Sunday closing laws that shut down all the local bars and liquor stores. Baptists support the same laws and lobby vigorously for them. Both parties gain. ..."

Between regulation and higher taxes, it's no wonder that small-business owners feel like the screws are being put to them.