Business World Blog

During trying economic times, it is ultimately the successful small business that helps the economy get out of trouble. Large businesses have often become too large for their own good. When large companies attempt to scale back, it is often too difficult for them to spot inefficiencies in their organizations. Their layoffs are untargeted and just designed to cut overall costs. In short, they are not able to trim the fat and focus on promising new areas because they are so large and beaurocratic.

Small businesses are  nimble and can react quickly to change. It is the small tech companies that paved the way for innovation in the 90’s. Small service-based companies have also done well in the past decade.

Unfortunately, I do not think we can rely on small business to save us this time around. While everyone likes to say they aim to help small business, the truth is the Obama administration is hurting it.

First, by raising tax rates on successful individuals, they are raising taxes on small business. Backers of the tax rates say only a small percentage of small businesses are affected, but these are the successful small businesses. Prosperity and employment is not created by small companies that are losing or making miniscule amount of money. They are made from highly productive, highly profitable companies. By increasing taxes, Obama is taking away more money from the owner to be able to reinvest in his or her business, as well as discouraging owners from making capital purchases. The owner must pay the cash up front, but amortize the cost over a decade, while retaining a smaller amount of the revenues for reinvestment purposes. Why expand?

Second, by borrowing large amounts of money for entitlements, the government will crowd out small business from the credit markets. Why should banks that are strapped for cash lend to small business when the government is in demand for large amounts of money? As t-bill rates increase, the cost of borrowing for small business will increase too.

Finally, by increasing capital gains taxes, Obama discourages venture capital into small business. In fairness, I think this is by far the smallest reason of the three. Even 20% is low enough to make a tidy sum off of a good investment into a small business. Of course, this number may well go up, as our deficits and national debt increase.