09.14.2010 0

The Little Engine That Couldn’t

By Rebekah Rast –

Do you remember The Little Engine That Could?

He was just a small engine that was able to pull an entire line of cars up a steep grade and down the other side. As the little engine chanted, “I think I can, I think I can” the entire way up, he was able to complete his task.

In many ways, America’s little engines are its small businesses. They hire, invest, grow and move America through its ebbs and flows.

Until now.

As these little engines, with the rest of America, sit in a deep-pitted recession, they aren’t able to chug their way out due to being derailed by taxes, regulations and an uncertain future.

Lately Obama has been encouraging special tax cuts for small businesses, yet at the same time encouraging a higher tax rate for the wealthy and on capital gains and dividends. These components all feed off each other. Small business owners invest and often have a higher income level. You can’t offer them tax breaks while threatening to raise taxes and expect good results.

“It doesn’t take someone with a Ph.D. in economics to understand that if you raise taxes on the wealthy and tax capital gains and dividends at a higher rate, then you are going to crush the economy you are trying to build,” says Bill Wilson, president of Americans for Limited Government (ALG).

It is the wealthy who invest. It is often times the wealthy who own small businesses. As larger corporations are moving overseas, growth in the small business sector is the engine that will drive America out of its recession.

Obama’s proposed tax breaks for businesses that invest in new equipment and plants come in the amount of $200 billion. His proposal will allow these businesses to write off 100 percent of their investment in one year, rather than over a series of years through multiple deductions.

Karen Kerrigan, president and CEO of Small Business Entrepreneurship Council (SBE Council), says there is a problem with these tax breaks. “Many small businesses are not investing and buying equipment right now,” she says. “There is little confidence that the economy will improve and businesses are holding onto their cash and capital right now.”

Kerrigan goes on to say that the threat that many of the 2001 and 2003 tax cuts are going to expire at the end of the year is becoming more of a reality and that is keeping business investments and growth at bay.

Tax breaks could greatly benefit some small businesses, but Obama’s threat to raise the tax rate on those individuals making more than $200,000 and couples making more than $250,000, coupled with his threat to raise the tax rate on capital gains and dividends, are having the opposite effect. Despite the offer of tax breaks, American companies are holding onto all they have for fear of what next year will bring.

“Businesses are holding onto cash and capital because they don’t know what’s going on,” Kerrigan says. “With the new health care system, possible Cap-and-Trade and insurance companies raising their rates —these are things the Administration has already put into place that are affecting businesses. No one knows where the economy is going to be in 2011. The elections might change things as well.”

America’s economy is too uncertain for small businesses and entrepreneurs to take risks in investment and growth opportunities. The very engine that moves America sits derailed because of new mandates and regulations that are stalling a recovery.

Congressional Democrats have also proposed a small business credit and jobs bill. H.R. 5297, Small Business Jobs and Credit Act of 2010, passed the House of Representatives in June. Obama continues to urge the Senate Democrats to pass the bill as well.

This legislation would give the, “Treasury Department $30 billion of taxpayer money and would authorize the Treasury Secretary to use the funds to make capital investments in small banks (less than $10 billion in assets) to ‘increase the availability of credit for small businesses,’ ” the House Republican Conference states in a report about the bill.

Small businesses see this bill in a different light.

“Most small businesses are saying this is not going to help us,” Kerrigan says. She reiterates that letting the 2001 and 2003 tax cuts expire on the wealthy really “nails small businesses.” And that any additional tax cuts or tax breaks aren’t going to help unless the current tax rates are extended.

It seems like a fairly easy fix. The government can keep all of its proposed money it wants to spend on tax cuts and tax breaks for now and merely extend the tax rates already in place to create some sustainability in the market.

“Small businesses hire people,” says Bill Thomas, former Chairman of the House Ways and Means Committee, the House of Representatives’ tax-writing committee. “They need to hire to expand. Those who are in the small business industry are those whose taxes are going to go up,” he adds, if Obama does not extend the tax cuts for the wealthy.

Why doesn’t this Administration see fit to extend the 2001 and 2003 tax cuts for the wealthy?

“It is an ironic argument,” former Chairman Thomas states. “Democrats say that rich people don’t consume all their income so it’s better for the government to take it instead of letting the rich invest and spend it how they want.”

This is the reason America is stuck is a recession. It is the wealthy who invest and grow capital. If more of their income is taken by the government, then they won’t be so inclined to invest in small businesses or hire more employees.

While Obama’s thinking isn’t far off from what should happen in terms of tax cuts and breaks, when coupled with what his Administration has already done and continues to do to the small business sector, there won’t be the positive outcome America hopes for.

“Raising taxes on anyone when America is in the position she is in is not a wise idea,” says ALG’s Wilson. “This Administration needs to extend the tax cuts. If Obama really wanted to make progress he would urge Congress to lower the corporate tax rate, which currently is the second highest in the world, as well as make the 2001 and 2003 tax cuts permanent.”

Putting specialized tax breaks before establishing a permanent tax rate is like putting the horse before the carriage. It doesn’t work. Small businesses need a pro-growth environment. Thus far, this Administration has done nothing to establish a friendly business environment.

Until that changes, America’s driving engine will be stuck at the bottom of the mountain derailed—and the rest of the nation will sit down there as well. Better get comfortable.

Rebekah Rast is a contributing editor to the Americans for Limited Government (ALG) News Bureau.

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