10 July 2008

Barack Obama will hurt growing businesses

In the first post of this series, I discussed how Senator Obama’s proposed tax increases would affect a small business during startup phase. The financial case one makes when determining if a startup is even feasible would be heavily burdened by Mr. Obama’s tax increases, leaving many potential businesses to stall in the ideation phase. Fewer small businesses means fewer jobs. Provided an entrepreneur forges ahead despite these challenges, self-funded growth would be further hampered by Mr. Obama’s proposed increase of capital gains and dividend taxes, and his failure to understand that many small business owners include business income on their personal tax returns, making them seem like individual high earners, even though the expenses often eclipse revenues at first.

This post centers on the growth stage, when a business starts hopping. Expenses are often highest, as the concept has proven out and investments in marketing and infrastructure can be heavy. Senator McCain proposes expensing equipment and technology investments in the first year, rather than amortizing over many years. This simple change should boost capital spending and more quickly reward businesses that make these investments.

The growth stage typically involves hiring, which tremendously benefits the community. Senator Obama’s plan to increase the minimum wage will make it more difficult to justify lower-skilled positions, leading to higher unemployment. These positions are often filled by younger people just entering the workforce, hoping to gain valuable experience to help them land their next, better job. Unfortunately for the next generation of workers, anti-free market minimum wages will delay their progress.

Senator Obama also intends to burden business owners with a “pay or play” scheme, in which they must provide health insurance for employees or pay a fine up to $12,000 per year per employee. This mandate will certainly result in fewer new jobs, a greater reliance on contract labor, and stunted business growth. When the costs of adding people are so high, many businesses will opt to delay or forgo expansion opportunities.

To summarize, Senator Obama’s na├»ve proposals will harm growth-phase businesses in many ways:
  • Investment in growing the business reduced because tax burden on individual filers will jump.
  • Hiring postponed or canceled due to higher, artificial minimum wages, and huge penalties for not provided mandated health insurance.
  • Capital spending would increase under Senator McCain’s plan to allowing expensing of such investments in year one.
Look for a continuation of this theme in my next post.

07 July 2008

McCain campaign event for small businesses

Recently I joined Senator John McCain’s Georgia Small Business Leaders steering committee, and this morning I participated in a press briefing organized by the McCain campaign, with the objective of highlighting the differences between the candidates' economic plans. As this was my first speech of this sort, I asked the campaign folks for guidance. They urged me to personalize the suggested talking points.

As it turns out this was not difficult. Over the next few posts I'll discuss the issues that directly affect my small business, beginning with the basic philosophy of the role of government.

Thankfully starting a business in Georgia isn't hard. The secretary of state makes it easy to register an LLC, and even the IRS simplified obtaining an employer identification number. My business doesn't require a special license, which can be onerous to obtain in some states. I share Senator McCain's belief that the best government is a small government, whereas I have yet to learn of a program or policy proposed by Barack Obama that doesn't involve government growth.

While planning the start-up phase of my business, I understood that my income would drop substantially from my previous corporate gig. To help bridge that gap I’m depending on income from my investments, which are taxed as capital gains. Senator McCain will maintain the current taxes on capital gains, while phasing out the AMT (alternative minimum tax). Senator Obama, on the other hand, has proposed increasing not just capital gains and dividend taxes, but income taxes, Social Security taxes, energy taxes, and business taxes.

The increased burden of Senator Obama’s proposed tax increases would A) make it much more difficult for potential owners to make the financial case of starting their own businesses, and B) reduce the money available for existing owners to invest back in their businesses.

How important are small businesses? In Georgia alone there are ~860,000 small businesses, and these are responsible for an astonishing 98% of all jobs in the state. Senator Obama’s proposal to nearly double the capital gains tax would clearly hurt the 618,000 Georgians who reported capital gains income in 2006.

Taxes aren’t painless, esoteric nuisances that affect only the wealthy. They directly impact business owners’ ability to reinvest in and grow their businesses, and small businesses are responsible for the majority of job growth in this country.

In future posts I’ll note how the proposals of Senators McCain and Obama influence other aspects of small businesses.