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Stop Squeezing Small Business

The opinions expressed by columnists are their own and do not necessarily represent the views of

As we celebrate Labor Day, let’s remember what makes this holiday possible in the first place: American workers. For the most part that means small business.

According to federal statistics, small firms (those with fewer than 500 employees):

• Represent some 99 percent of all employer firms. • Employ more than half of all private-sector employees. • Pay 44 percent of total U.S. private payroll. • Have generated 64 percent of net new jobs over the past 15 years.

Small businesses also represent the true spirit of America. Yes, more than half a million small firms fail each year, yet more than 600,000 new such ventures are launched annually. Hope springs eternal.

Politicians give lip service to the importance of small business. We can expect to hear plenty of stump speeches this month about what lawmakers are doing to help private companies grow and hire. But the actions don’t match the rhetoric.

Take tax policy.

On Jan. 1, the tax rates facing small businesses are scheduled to jump, as the 2003 tax cuts expire. The top two income tax rates now stand at 33 percent and 35 percent, but would increase to 36 percent and 39.6 percent.

This is crucial, because while only 8 percent of small businesses pay the highest two tax rates, the Treasury Department says those businesses generate almost three-quarters of all small-business income and shell out more than 80 percent of all income taxes paid by small businesses. Increasing tax rates on these businesses would hamper economic growth.

“Higher tax rates would drain the businesses of cash flow, the lifeblood of any business, and would diminish the incentives to grow and add new workers,” economist Curtis Dubay of The Heritage Foundation told lawmakers last spring. “Raising rates on these successful businesses would damage the economy at any time, but doing so now when the unemployment rate is starkly elevated and the recovery just underway is stunningly foolish.”

So what should lawmakers do when they return from their summer vacation? Well, implementing a pro-growth tax policy would be a good start.

Lawmakers could make the 2003 tax cuts permanent, thus avoiding a big tax increase on small businesses. They should also lower capitol gains tax rates, which are set to climb to 20 percent next year. It would make more sense to hold those rates at 15 percent, or even slash them further. President Obama apparently agrees: He’s announced a plan to allow small businesses to write off the expenses of all capital purchases.

In addition, our government shouldn’t resurrect the death tax.

In recent years, the estate tax has been phased out, going all the way to zero this year. That helps small businesses because it allows a founder to pass the family business (or farm) along to family members in a will without having to sell off huge chunks to pay the death tax.

A study last year by Douglas Holtz-Eakin and Cameron T. Smith found that permanently repealing the death tax would create 1.5 million jobs. Remember that just last year lawmakers agreed to spend $800 billion for a “stimulus” package that (taking the government’s generous estimates at face value) funded about 750,000 jobs between April and July.

A full death tax repeal would “cost” the government roughly one fifth what it will shell out in stimulus funds and create real, tax-paying jobs. It’s a win-win.

Labor Day was created back in the days when big unions were wealthy and powerful. These days, unions represent only a small (and shrinking) fraction of the workforce. And many of those union jobs (7.9 million) are in government workplaces.

America’s growth, and its future, depends on a healthy private sector and a thriving entrepreneurial spirit. Let’s make sure we don’t smother small businesses -- so essential to creating a future filled with jobs and opportunities -- with excessive taxes and regulations.

Ed Feulner is president of The Heritage Foundation (

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