Let them be

May 10, 2007

Free Market Foundation

Politicians of all stripes enjoy showering small businesses with all manner of totems and gifts. But what the government gives with the right hand it has a nasty habit of taking away with the left. There’s a much better way to pay respect: Get out of their way, says Veronique de Rugy, senior research fellow at the Mercatus Center at George Mason University in Washington DC.

This is not to say that there is no role for government, says de Rugy. Here’s one: Free capital from taxes:

The United States imposes a high tax rate on capital, reducing investment, giving firms an incentive to move profits abroad and encouraging costly tax avoidance schemes.

Economists instead conclude that an optimal tax system in most cases should not include a tax on capital.

Reducing the capital tax would be a significant policy change to help all small firms, not simply those favoured by a special programme.

A few more ideas could include:

Tax relief in the form of deductions, exclusions and exemptions, among others, to increase the proportion of entrepreneurs who make new capital investments and hire more workers.

Reform of the Alternative Minimum Tax (AMT); the Heritage Foundation estimated the number of small business owners subjected to the AMT has more than tripled between 2005 and 2006 from 1.9 million to 6.4 million

The estate tax forces too many heirs to sell off parts of family firms just to pay the taxes due, damaging their firms’ competitive prospects for the future.

Finally, governments at all levels should reduce the large regulatory burdens that afflict small business, says de Rugy. In a Small Business Association study on the impact of regulatory costs on the smallest firms, complying with federal regulations costs companies with fewer than 20 workers an average of $7,647 per employee.

Source: Veronique de Rugy, Let Them Be, Wall Street Journal, April 23, 2007.

For text: http://online.wsj.com/article/SB117728369191078432.html

For more on Economic Issues: http://www.ncpa.org/sub/dpd/index.php?Article_Category=17

FMF Policy Bulletin/ 02 May 2007