Politicians love to extol the virtues of small business and praise the entrepreneurs who take risks to create jobs – when it's politically expedient for them to do so. But when the political winds change, the political establishment is quick to take to the airwaves to vilify small business owners for being profitable, dubbing them "millionaires" and calling for an increase in their taxes.
This political two-step is made possible by the fact that small business owners - from sole proprietorships to companies with hundreds of employees - most often report company earnings as personal income. These companies are most often "subchapter S-Corporations" or LLCs where the business income "passes through" to the individual so as to avoid being double-taxed, hence these are known as "pass-through companies." These entrepreneurs must set aside much of their reported income to support their businesses in bad times and for investing in the future. Even if they have to cut their own salaries to stay afloat, they are still described as "millionaires," making them easy prey for politicians looking for a villain.
In case you missed that, let me say it again, differently: the income a business generates is not primarily for the business owner – it is for the business: operations, payroll and reinvesting in the community. Business owners, particularly those who file their taxes as individuals, look like high-income earners, but only on paper, and this is a critical distinction that government often seems to forget – or ignore.
For some perspective, there are more than 4.5 million S-Corporations in the United States today and, according to Ernst & Young, 54% of all private sector employees – some 69 million people – currently work for these types of "pass-through" businesses. So when politicians talk about putting the squeeze on "millionaires" for more taxes – ostensibly to bring more revenue into government – their proposal may sound good but consider this: Higher taxes means less profit for companies to invest in their business and may mean they have to eliminate existing jobs as a result. Moreover, fewer people working means the government receives less revenue. In the middle of the worst job crisis this country has seen since the Great Depression, raising taxes on businesses is a profoundly bad idea.