Why our government hates small business

“An upcoming wave of new workers in our society will never work for an established company if they can help it. To them, having a traditional job is one of the biggest career failures they can imagine.”

So wrote Michael S. Malone for The Wall Street Journal two years ago.  And he had stunning statistics to back it up:

“Half of all new college graduates now believe that self-employment is more secure than a full-time job. Today, 80% of the colleges and universities in the U.S. now offer courses on entrepreneurship; 60% of Gen Y business owners consider themselves to be serial entrepreneurs, according to Inc. magazine. Tellingly, 18 to 24-year-olds are starting companies at a faster rate than 35 to 44-year-olds. And 70% of today’s high schoolers intend to start their own companies…”

And that’s a good thing, right?  Entrepreneurship is the backbone of the American economy.  According to Census data, more than 90% of all U.S. businesses have 4 or fewer employees, compared with 0.4% that have 100 employees or more.

The SBA categorizes a small business as having fewer than 500 employees– which kind of tells you where our government’s head is at.  Still, SBA says that small businesses account for more than half of all U.S. employees at 60.2 million, paid 44% of U.S. payroll, and 64% of new job creation.  That’s not including some 23 million non-employee business owners who make their living in small business.

So if small business makes such a great contribution to the economy, why does our government seem to hate small business?  It has some very practical reasons.

First, consider the political challenges faced by elected officials and those aspiring to public office.  In order to garner votes, they must raise cash quickly and efficiently.  Some, like Howard Dean, have done so using the internet to reach out to individuals.  But a far more efficient means is to appeal to a few small, wealthy businesses.  Consider: the same census data cited above shows that those small businesses that make up 90% of American business, bring in less than 1% of the gross receipts.  But businesses having 100 employees or more brings in 70% of the gross receipts.  The divergence gets even more striking: 50% of gross receipts are earned by companies with 2,500 employees or more, a mere 3,500 of America’s more than 25 million businesses.  As a politician, would you rather approach 3,500 wealthy businesses for a contribution, or try to chase down 25 million small business owners?

Now consider the all-important function of taxation and revenue.  Half the gross receipts are earned by businesses with fewer than 2,500 employees (25 million), and half are earned by those businesses with 2,500 employees or more (3,500).  When the IRS sends auditors into the field to ensure that everyone is paying their fair share, their budgeters are concerned about how much return they’ll get for their efforts.  They know that many small businesses cheat on their taxes– but they don’t have enough auditors to check up on everyone, and when they do, the returns aren’t worth the effort.  There’s a much bigger bang for the buck auditing large firms.  Says Kiplinger’s Tax Letter, “Audits of Schedule C filers yielded 43% less revenue per hour than exams conducted on other types of entities.”  [emphasis added]  Wage earners, too, are far simpler to audit than small businesses– in fact the new IRS tax preparer registration  program will require preparers to pass a specific test to qualify to prepare small business returns.

I’ve seen this bias against small business in action at the IRS.  During a heated discussion with an audit subject, the auditor acknowledged that the IRS intended to make an example of the taxpayer in order to discourage other similar businesses.  Said the auditor, “We don’t think businesses like this should exist.  You’re too small.”  (I’m betting he wasn’t supposed to say that.)

There’s one more reason our government prefers we work for a large corporation rather than be self-employed: it keeps us off the streets.  Consider this quote from a report from on a recent tea party event in the Boston area:

“Most of the people at the Tea Party rally said they were either unemployed or self-employed, and so were able to come to Boston in the middle of the day on a Wednesday.”

Corporate employees who are punching the clock are a lot less likely to skip work for a march or protest.  And when everyone, left and right, is angry at the government, you don’t want them out on the streets.

Put it all together, and it’s no wonder our government would prefer to stem the tide of entrepreneurship.  Life would be so much easier for them if we all clocked in every day.

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