October 26, 2014

Small Businesses: Stop With the Taxes and Regulations

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Mark Cuban, billionaire owner of HDnet and the Dallas Mavericks, is calling for abolishment of all taxes on small businesses with 25 or fewer employees in the U.S. He says that small businesses of that size should be exempt from taxes of all kinds:

“If we really want to stimulate job creation in this country, take the same approach to small business with 25 or fewer employees that we take to Internet taxes. Outlaw them.

No taxes of any kind on small businesses with 25 or fewer employees. No employer payroll tax. No state or local taxes. No taxes on earnings. Nada. The business owners will pay income taxes on their personal income they pay themselves, but not corporate earnings

The only taxes they would collect and remit are sales taxes, the employee’s portion of payroll taxes and of course they would still file personal income taxes on their individual earnings.

Make this available only to individuals, and only for a single company (to prevent gaming the system by having multiple 25 employee and under companies)

The impact on the economy would be amazing and immediate. Those without jobs would be able to work for themselves, they would be able to join together and start companies. They would be able to take risks with far less capital. Sweat Equity would be all it takes to start a business.

Not only would we see hundreds of thousands of new businesses started seemingly overnight, with millions of new hires, but from those new businesses would come new ideas that hopefully would give us our next “Internet”, an engine for economic growth that super cedes today’s ideas.”

The idea of lowering taxes is certainly attractive. However, his plan would not have the intended effect of causing more startups, mainly because the majority of small business startups do not pay corporate taxes today. That’s not what’s holding startups back.

We know that 20.4 million (out of roughly 27 million) small businesses are single-person businesses. Most are sole proprietors or set up as LLCs or taking advantage of S-Corp status. They don’t pay separate corporate tax — income is passed through and taxed like individual personal earnings.

Also, many small businesses use independent contractors in the startup stage, instead of hiring employees, avoiding the payroll tax issue.

Corporate taxes and payroll taxes are in fact serious issues — but they are issues that companies address later on as the business is growing, not when you’re deciding whether to start a business.

While I doubt that Cuban’s plan would have the effect he hopes, of promoting a groundswell of startups, still I like the idea of lower taxes in general — and also less regulation of small business.

Taxes and regulatory burden are issues of serious concern for small business owners. The National Federation of Independent Businesses (NFIB) published a survey last month of the top problems and concerns facing small businesses. Out of the top 10 problems rated as most severe, half of them had to do with taxes and/or regulatory burden, including:

  • Federal Taxes on Business Income
  • Property Taxes (Real, Inventory, or Personal Property)
  • Tax Complexity
  • Unreasonable Government Regulations
  • State Taxes on Business Income

To address these issues our lawmakers have to first address the underlying issue: the size of government. The bigger our government gets with more and more regulations, the more costly it becomes, and the more taxes that need to be collected to pay the costs. The first step is to get spending under control — then reduce paperwork and unnecessary regulations that interfere with business, and lower taxes for individuals as well as businesses.

Read also my other article about the size of government and the impact on small businesses in: Congratulations … You Have Now Worked Enough to Pay for Your Government.

Hat tip to Editor at BlawgReview for sending along the link to Cuban’s article. 

15 Comments ▼

Anita Campbell - CEO


Anita Campbell Anita Campbell is the Founder and Publisher of Small Business Trends and has been following trends in small businesses since 2003. She is the owner of BizSugar, a social media site for small businesses, and also serves as CEO of TweakYourBiz.com.

15 Reactions

  1. I couldn’t agree more about the concerns small businesses have with taxes and regulations. The FDA is now poised to put hundreds if not thousands of small businesses (like my own) out of business with the FDA Globalization Act. As written, it would add paperwork and fees that small handmade beauty products companies have neither the funds nor the staff to comply with. Why “regulate” an industry that is already safe–11 billion personal products sold annually, fewer than 150 adverse reactions (mostly skin irritations)?! Does the FDA need to cast the net wider when it cannot accomplish its current goals?

    There’s more information about the FDA Globalization Act here: http://www.indiebusinessblog.com/indie_business/fda_globalization_act_of_2008/index.html
    and a petition to sign if you are a small business owner or a consumer who might be affected by the loss of these businesses and their products. Our lawmakers need to hear from us as small business owners and consumers so they can make the decisions that will support economic growth! Small business is such a vital part of our economy in the US and excessive, unnecessary regulation only acts to stifle existing small businesses and keep new ones out of the marketplace.

  2. What would help isn’t not having to pay taxes, but not having to deal with the tax agencies. It took me years to convince Illinois that custom software consultants don’t sell goods and therefore didn’t need to file sales tax returns.

    I would be happy if the Illinois Department of Revenue would just drag themselves into the modern world and let me file and pay online. Actually, scratch that, I’d settle for them actually answering the phone when I call.

  3. It’s a sad situation and it’s disappointing that there isn’t more “backing” and encouragement by our government to support small businesses. I don’t know if this is true or not (and correct me if I’m wrong) but I have often heard that immigrants can open a small business in our country and are allowed to operate tax free for a term of 5 years. If that’s true, why for them and not for our own citizens? What’s the difference? Not trying to raise an issue here, just wondering if that’s the case.

  4. While Cuban’s conclusions may be simplistic, his premise has merit. I would agree with Anita’s comments only up to the point of emphasis, “issues that companies address later on as the business is growing” regarding corporate and payroll taxes. The majority of single-person businesses will not grow and have no plans to grow. This leaves them with complicated and financially onerous tax burdens (including compliance activities) AND the ever-expanding regulatory environment with which to contend, and pay for.
    Regulation by agencies of the government are the main culprit. Congress passes a law in knee-jerk response to usually isolated incidents; the law is written in ambiguous terms; the appropriate agency is then responsible to enforce the ambiguity; court cases further clarify and EXPAND the scope of the law/regulation; finally, the small business owner is included in a regulation that was never initially intended to apply to them.

  5. It is very disheartening to realize the hoops you have to jump thru just to start a business and keep it running. The government doesn’t realize or care that their taxes and regulations only discourage new growth. Why does it seem like we are always getting punished for getting ahead?

  6. I LOVE this guy! Given the higher risks, the growing barriers to entry in many markets, the lack of affordable health care options to attract key talent, and that right now the overwhelming majority of jobs being created are from small business (despite these hurdles…), yes, this makes sense.

    Tax breaks should go to those that add something to the economy. Adding jobs should be rewarded. And likewise, eliminating jobs should not. And eliminating taxes would provide added capital for small businesses to add new jobs.

    Mark Cuban. I knew he was a smart guy.

  7. Anita,

    Great info – it would be a great help to change the regulation to help us enjoy the growth potential of the bigger guys do.

    Maybe signing a petition would help? 27 millions of petition signees are enough to put the change into the regulation.

    Cheers!

  8. I think the problem is not with taxes, but with the level of subsidies available to small businesses. Industrial R&D is increasingly important, because R&D is correlated to economic growth. One of the better-known indirect federal incentives is the research and experimentation (R&E) tax credit for corporations in the US and the Scientific Research and Experimental Development (SR&ED) tax credit in Canada.

    U.S. corporate claims for the R&E tax credit totaled an estimated $6.4 billion in 2001. However, the processes to claim for these tax credits are convoluted, and thus small businesses are not always able to take advantage of these tax credits. The government needs to facilitate the process by which small businesses can claim for R&E tax credits.

  9. I couldn’t agree more with everyone here. It would be wonderful if our government would encourage people to own businesses. You would think they would want to offer tax breaks and incentives for businesses that will create jobs and better smaller communities.

  10. Mark Cuban’s proposal certainly is interesting, but I question whether it is either feasible or effective for incentivizing small business.

    Given the problems facing the Social Security system already, I question how you could cut contributions to the Social Security trust fund in half for the millions of people who work in small businesses even today.

    Apart from that, I think that the point made in the article is correct – that few small businesses pay income taxes on the earnings of the business today. Most small businesses set up as a limited liability company, an S corporation, a partnership, or a sole proprietorship. None of those entities pays federal income taxes and in most cases they pay no state income taxes. Most of the small businesses that are set up as regular corporations pay out all or substantially all of their earnings to the owners as salaries.

    As far as real estate taxes, most small businesses rent rather than own their real estate. Unless we also give a tax break to landlords, wiping out real estate taxes on small businesses would have little effect.

    Certainly we need to encourage the formation of new businesses, but I think we need to look deeper than Cuban’s proposal.

  11. How about getting rid of federal taxes on all businesses and individuals?

    The Fair Tax will do that.

    There would be no federal income or payroll taxes for anyone. The IRS would cease to exist!

    If you like that idea, check out the link above.

  12. I think, the ideas of tax exemption for the small business are good. But, the question is that whether these will bring any negative impact on the small businesses, considering the facilities small businesses are getting from the government.

  13. Good to hear that someone is speaking up for less regulations and less red tape, lower taxes and for a smaller government. As I said in my comment on the Open Forum, I will come back to this issue and write a blog post on EGO blog.

    Best Premises,

    Martin Lindeskog – American in Spirit.
    Gothenburg, Sweden.

  14. Tax is a major issue in all the countries around the world. USA is a developed country and even here people face problems regarding tax issues. I agree that small business should be given tax exemption because they are the ones who would suffer most in case of any major economic changes or natural catastrophe. I think the government can also introduce what Chris said; giving five years tax free for start up businesses. This can be a big boost.

  15. Getting rid of taxes for businesses of that size might be a huge disincentive for businesses to expand beyond 25 employees. I have some more thoughts on my blog: http://www.usnews.com/blogs/risky-business/2008/8/8/why-getting-rid-of-small-business-taxes-might-not-be-such-a-

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