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.
Why does this matter? The most powerful engine of job creation is new and small business. The government's own Small Business Administration statistics show that small businesses have created more than two-thirds of net new non-farm jobs over the past decade and a half, accounting for nearly half of the nation's private sector payroll. They also produce 13 times more patents per employee than large firms, many of which are likely to influence the creation of even more job-creating start up businesses.
The Millionaire Next Door, a book by Thomas J. Stanley and William D. Danko, points out that half of the millionaires in this country own their own businesses. That means that for the most part, they took risks, sacrificed personal income so they could grow their businesses, put people to work in their communities and, and by doing so, made significant contributions to the nation's economic success.
The bottom line is the lifeblood of these companies – their profits – is actually the lifeblood of our national economy, and those in the political establishment who cynically see an easy target for short-term political gain put jobs and economic recovery at risk. Put them out of business, and we put the country out of business.
Instead of targeting the actual job creators in our communities, the politicians in Washington should be focused on passing pro-growth policies that will get our economy moving again and will put people back to work. To make sure Washington hears this message loud and clear, I recently became a member of the Job Creators Alliance. We are a growing group of current and former CEOs who have spent our careers in the private economy. We are job creators – large and small – committed to defending the free enterprise system that has made our country’s economy the most prosperous in history.
We know what makes America great because we've seen it first hand. But if Washington continues to demonize success and target small businesses to fund their reckless spending, our children and their children will inherit a very different America than the one we were fortunate enough to start our careers in.
Mike Whalen, a Member of the Job Creators Alliance, is President & CEO of Heart of America Group