Why Letting Tax Cuts Expire Will Hurt Small Businesspeople…Like Me!

What drives an entrepreneur to start a business? Is it solely about money? Or is there something more? I argue that often it is the same creative drive that compels an artist to paint, a musician to compose, or a sculptor to look at a piece of rough marble and see an angel inside. And those who understand the mind of the small business owner know why the proposed tax increase in 2011 will do more harm than good to the very people this economy needs most to create jobs.

On FBN’s Bulls & Bears recently Democratic strategist Jehmu Greene, the token liberal steak tossed into the wolf den of laissez faire commentators, uttered words to the effect that if we allow the Bush tax cuts to remain, the “rich” (I guess that’s me?) will not put the money into the economy but rather just squirrel it away “in their banks…It would not go into job creation or creating capital for small business.”

My first thought was: “In my bank? Really? How many businesses have you owned?” (To be fair she did co-found some internet venture called Urban Hang Suite which shuttered in 2003). But then I reminded myself that, like Ms. Greene herself who has been in non-profit and/or government almost her entire career, very few people in the Obama administration, from the president on down, have ever started a business. Thus they cannot understand what drives entrepreneurs to succeed. They think it is just about take-home pay.

It’s said that small business owners work eighteen hour days for ourselves so we don’t have to work eight hours a day for someone else. And often our income on a dollar/hour basis is less than the established firms we may have left to go on our own. Certainly this is generally true for those few scary years at the beginning when a myriad of mistakes are made and unanticipated events occur that prompt the principals to pay ourselves only after all other obligations have been met So why do it? Why take such risk?

First, the sense of pride of ownership and having built something from nothing is as strong in an entrepreneur as it is in the artists I alluded to earlier. This is often a foreign concept to those who have spent their lives in secure positions in academia, government, or as line workers and middle managers in huge firms and thus do they discount our passion to create something while passing judgments like Ms. Greene’s. Do not underestimate the fact that more than just money drives us to take such enormous personal risk.

Secondly, there is of course that brass ring of selling the firm and walking away with a nice pay-out in hand. Still, I know of very few successful entrepreneurs who upon a sale leave the world of business. Rather they look for new ventures. New challenges. New job creating entities. Name an artist satisfied at just one piece.

Now, our company’s value is enhanced by increased business. We have to grow in order to build our firm into a salable entity. And that usually means a larger workforce to generate more revenues. It’s no coincidence that the targeted 2% of Americans making north of $250k create 28% of the nation’s new jobs. The reason letting the tax breaks expire is an impediment to that growth is that many small business owners have their business and personal income intertwined. And as such a 5% tax on their personal income is a de facto 5% surcharge on their business. For someone making $1mm a year, that is a $50k hit to their business…two entry level employees. In the end, we are employers, not charity wards. We take the risks, it is our capital–and homes–at stake and so we will look to other ways to cut before reducing our own deserved compensation. So in order to make up the shortfall and keep an owner level with 2010 all else being equal, these two employees may get let go. Certainly an owner will put off hiring until he/she knows if they can afford new hands or not. The new mantra for small business is “don’t hire one until you need two.” Not the best recipe for getting the job creators excited about growing the payroll is it?

Before sitting down to write this I looked over my small company’s five-year projections. Always we try to gage our fixed costs. When we have some certainty on costs we can plan around them and ‘stress test’ to see how we survive in given revenue scenarios and prepare measures today in anticipation of any issues down the road. Then we can better tell, for example, how much interest we can afford each month on a loan (assuming we can get one) to bring in more capital and expand the firm–and hire people we need to get us to the next level and that much closer to that holy grail of being bought out while satisfying our desire to build something special along the way. But right now there is a big blank “N/A” on the spreadheet cells labeled “Federal Income Tax.” Until I know what to plug in there, it will be hard to move forward.

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