The Internal Revenue Code is nearly 70,000 pages and about 3.8 million words long. It is highly unlikely that anyone would dispute that this complex and confusing system is in dire need of reform — especially for small businesses.
Tax reform is critical to the nation’s ability to create jobs and grow the economy.
This is particularly important for small companies — our nation’s best job creators, responsible for creating about 70 percent of new jobs — because most spend a disproportionate amount of time and money to comply with the tax code.
And unlike larger corporations, small firms often lack the resources to hire expensive accountants or legal assistance. In fact, studies have shown that the average compliance cost per employee for small businesses is almost twice the per-employee cost for the average large firm.
Additionally, more than 95 percent of businesses are organized as pass-through entities — those that pay their taxes on their individual tax returns rather than on a corporate return. Together, pass-throughs such as LLCs, partnerships, S Corporations and sole proprietorships, account for 54 percent of all business net income and employ 54 percent of the private-sector workforce.
In a recent hearing, William Smith, chief executive officer of Termax Corp. in Lake Zurich, Ill., explained how paying taxes at the individual rate affects business and his family.
“[The] financial and manufacturing success of our employees and business are directly tied to that of the business owners — the Smith family,” he said.
Because he pays business income taxes on his individual return, he said, “we are taxed on income we do not take out of the company but leave in the business to reinvest. This means we have fewer resources to put toward hiring, training and buying new machines.”
That is why Congress should consider individual reform as well as corporate reform when evaluating approaches to tax reform.
Most small businesses may not benefit if Congress tackles only corporate reform. Take note of a report by the Joint Committee on Taxation, which estimates that raising the marginal tax rates for individuals making $200,000 and families making $250,000 would affect about 750,000 taxpayers and account for a whopping 50 percent of the estimated $1 trillion in business income reported in 2011.
Small businesses are the catalyst to lead us out of recession — and their tax treatment is vital to their ability to create jobs.
Former IRS Commissioner Fred Goldberg may have put it best when he said tax reform should make a contribution to reversing the “job-destroying distortions and complexity” that are now so much a part of our system.
The more capital that small-business owners must shell out to comply with the tax code, the less capital they have to spend on growing their business and hiring more workers.
This is not a partisan issue — in fact, President Barack Obama and House Ways and Means Chairman Dave Camp (R-Mich.) have pledged support for fundamental tax reform. Congress made a step in the right direction earlier this year with passage of the bipartisan Small Business Paperwork Mandate Elimination Act (H.R. 4), which amended the Internal Revenue Code to repeal the 1099 reporting requirement. But we can’t stop there — we must continue working together on more tax reform policies that will unleash small-business growth, not plague owners with more uncertainty and complexity.
If we want to create an environment that fosters investment, growth and jobs, then a close look at the tax code should be top priority — and small businesses must not be left out of the picture.
Rep. Sam Graves (R-Mo.) is chairman of the Small Business Committee.