Small business buried in paperwork

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Why do all the pro-small-business speeches offered by politicians make life so difficult for the entrepreneurs who innovate, spur economic growth, and create jobs?

In late July, President Obama held a photo op at a small business in New Jersey.

“Small businesses create two out of every three jobs in this country,” he said. “So our recovery depends on them. And if we want to keep America moving forward, we need to keep investing in our small businesses.”

Sounds good, but then Mr. Obama commented on what motivates the American entrepreneur.

“This is … more important than just our economy. It’s also about who we are as a people. Because America has always been a place where if you’ve had a good idea and you’re willing to really work hard for it, you can see it through and you can succeed. That’s what gives the worker the courage to leave her job to become her own boss. It’s what propels people to risk their savings on an idea that they believe might just change the world.”

Bravo, Mr. President!

However, there is the not-so-little matter of policy reality not just falling short of political rhetoric, but directly contradicting it. Consider the various efforts led by this president to hike taxes and increase regulation. And it’s critical to understand the paperwork and red tape burdens that come with increased government intervention in and interference with business and the economy.

Of course, such burdens did not start with the Obama administration.

Here’s what the The Tax Foundation reported a few years ago:

“In 2005 individuals, businesses and nonprofits will spend an estimated 6 billion hours complying with the federal income tax code, with an estimated compliance cost of over $265.1 billion. This amounts to imposing a 22-cent tax compliance surcharge for every dollar the income tax system collects. Projections show that by 2015 the compliance cost will grow to $482.7 billion.”

And who carries the largest burden? According to The Tax Foundation analysis, business bears 56 percent of tax compliance costs, with individuals at 42 percent and nonprofits 2.5 percent.

Unfortunately, the burdens have grown, and will continue to grow, under the Obama White House and the current leadership in Congress.

Just consider an item slipped into the health care legislation. Beyond the many and considerable spending, tax and regulatory costs imposed, ObamaCare includes a mandate that has nothing to do with health care. But it promises to be a paperwork nightmare for businesses of all types and sizes.

Starting in 2012, under Section 9006 of the new health care law, businesses will have to file a 1099-MISC form with the IRS for every transaction with a vendor of at least $600. Just ponder the paperwork and manpower costs that would accompany this mandate, along with the costs to the taxpayers in terms of the IRS dealing with all of these new forms.

In its latest report to Congress, the National Taxpayer Advocate highlighted several potential problems, including identity theft as many sole proprietorships use the owner’s Social Security number as its TIN; record keeping and software costs; and looming IRS penalties. The report also pointed out that “the IRS will face challenges making productive use of this new volume of information reports.”

The purpose of this mandate is not to make health care more affordable and available. Instead, it’s a money grab to close the so-called “tax gap.” The tax gap has been ginned up by the IRS, with the point being that taxpayers fail to pay all they owe to the government, with the estimated gap supposedly approaching $300 billion annually.

Of course, how much confidence one can put in such guess-timates very much is an open question. For good measure, does it really make sense to jack up tax compliance costs in order to improve tax compliance?

The National Taxpayer Advocate summed it up this way:

“The Office of the Taxpayer Advocate is concerned that the new reporting burden, particularly as it falls on small businesses, may turn out to be disproportionate as compared with any resulting improvement in tax compliance.”

Perhaps a better option would be to reduce the complexity and costs of the tax system, as well as cut the overall tax burden, in order to trim down tax avoidance and evasion.

Some members of Congress get it.

The Small Business Paperwork Mandate Elimination Act has been introduced by Congressman Dan Lungren (R-CA) and Senator Mike Johanns (R-NE) to repeal the new and costly 1099 mandate.

Lungren noted who would be hit hardest by the 1099 mandate:

“Large corporations have whole divisions to handle such transaction paperwork but for a small business, which doesn’t have the manpower, this is yet another brick on their back. Everyone agrees that small businesses are job creators and the engine which drives the American economy. I am dumfounded that this administration is doing all it can to make it more difficult for businesses to succeed rather than doing all it can to help them grow.”

The Small Business and Entrepreneurship Council (for whom I serve as chief economist) has launched an online petition drive to repeal the 1099 mandate at Stop1099.org.

Small businesses need less political talk about loving small business, and more substantive action that will start digging the entrepreneurial sector out from under government’s tax, regulatory and paperwork avalanche.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. He can be reached at rkeating@sbecouncil.org.