What small business owners think about their income tax ROI

October 15 marked the end of the extension period to file personal income tax returns and pay up for last year. So in our online poll last week we asked small business owners, “How do you feel about the income taxes you pay?”

Photo courtesy of morgueFile

Photo credit: MorgueFile

Regardless of when you settled up with the government, if a small business owner pays more taxes beyond scheduled remittance it’s at once good news, bad news and compounded bad news.

It’s good news because paying more taxes usually means you were profitable. Congratulations. The bad news is the cash you remit to Uncle Sam reduces precious working capital. The compounded bad news is most small businesses are S Corps and LLCs, which pass profits through to their owners as taxable income. That number is added to salary and distributions, and all are taxed at the personal rate. But it gets worse. Small business profit is often phantom income: taxable income without cash to pay the tax.

According to the Tax Policy Center, income tax paid by individuals and businesses in 2007 amounted to 10.8% of GDP. After the financial crisis tax receipts dropped to 7.4% of the economy in 2010. By 2013 the tax to GDP ratio had risen to 9.5%, or $1.6 Trillion. These numbers tell us: 1) Americans pay a lot of taxes; 2) Economic growth = tax receipts grow.

With so much revenue potential when taxpayers and businesses thrive, one would think the government would try to create a favorable environment for those who hire and make payrolls. Unfortunately, much of our tax dollars feed a bureaucracy that’s particularly good at one thing: regulating business.

Research by Wayne Crews of the Competitive Enterprise Institute estimates annual regulatory compliance costs businesses $1.88 Trillion. At 11% of GDP, that’s $280 Billion more than tax receipts. Again, it gets worse: Crews says small businesses pay double per employee per year for regulatory compliance than big businesses. For small business, regulation compliance is a parasitic stealth tax.

Alas, small business owners know when they pay income tax, part of their return on investment includes funding an overgrown and growing regulatory state that can cost them more than taxes but is almost impossible to budget for.

Write this on a rock … High taxes and over-regulation are government’s foot on the neck of small business.

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