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Impact
of the FairTax(SM) on Small Business The present tax
system has adverse impact on small businesses. Replacing the federal income
tax, the payroll tax, and the estate and gift tax with a single rate,
simple national retail sales tax on the retail sale of all goods and services
would dramatically improve the economic environment for small businesses.
It would reduce compliance costs and tax burdens and improve bottom line
profits. Under the FairTax,
small businesses would enjoy a zero tax rate. Corporations, subchapter
S corporations, partnerships, limited liability companies, and sole proprietorships
would pay no tax on their income. Both the employee and employer share
of payroll taxes, the self-employment tax rate and the estate and gift
tax would be abolished. Compliance costs
are a much more substantial economic drag on small business than they
are for larger businesses. According to the Tax Foundation, small businesses
spend $724 to comply with the income tax for every $100 they pay in tax.
More than 90 percent of all U.S. corporations have assets of $1 million
or less and, therefore, bear tremendous relative compliance burdens. In
fact, small corporations bear a compliance cost burden about 27 times
greater than the largest U.S. corporations, those with $10 billion or
more in assets.[1] A small business
today must use tax accounting rules (which are different than generally
accepted accounting principles) to keep track of: income, inventories,
various types of expenses (some deductible, some partially deductible,
some not currently deductible and some never deductible), depreciation
(which must be recorded in at least two ways for regular and alternative
minimum tax purposes), tax basis for assets sold, various pension and
deferred compensation rules (including participation, top-heavy and non-discrimination
rules), various employee benefits rules, and so on. The small business
must also keep track of payroll taxes, including social security, medicare
and unemployment taxes as well as file a plethora of information returns
on its payments. Small business compliance
costs would drop dramatically under the FairTax because the only question
relevant for sales tax purposes is "How much did you sell to consumers?"
Period. Businesses that sell to other businesses would have virtually
no compliance costs since intermediate business-to-business sales are
not taxed under the FairTax plan. In addition, under the plan, retail
businesses would receive an administration fee that would allow them to
keep a portion of the sales tax they collect to compensate them for collection
costs. The Tax Foundation estimates that overall compliance costs will
fall by more than 90 percent.[2] Small businesses
are found in service, retailing, and other labor-intensive industries.
Both complying with and paying the payroll tax and the income tax impose
a major burden on these small businesses. Moreover, the service sector
and the retailing sector typically have much higher effective income tax
rates than other businesses. Each year, many small
businesses and farms must be sold out of the family to pay estate and
gift taxes when the founding generation dies. After a lifetime of hard
work and risk-taking, the estate and gift tax deprive the small business
owner or family farmer of the right to pass his or her life's work
on from father and mother to son or daughter. The estate tax punishes
those that save and work hard to build an enterprise. In contrast, those
that deplete their estate by heavy spending in their retirement years
pay little or no estate tax. Under the FairTax
plan, the estate and gift tax will be repealed. The need for small businesses
and farmers to engage in expensive estate planning involving attorneys,
complex estate freeze transactions and expensive life insurance plans
in anticipation of future estate and gift tax liability would
disappear.[3]
Heirs would no longer need to sell the business or farm out of the family
or borrow heavily, putting the business at risk, to pay the estate tax. Perhaps as important
as these factors, is the impact that the FairTax would have on economic
growth. Small businesses thrive in a healthy, growing economy but because
of inadequate capitalization and lack of access to sufficient bank credit,
they have much more difficulty in a stagnant or shrinking economy. The
FairTax would cause the economy to grow and become much more dynamic.
In a recent paper, Dale Jorgenson of Harvard University states that, "the
revenue neutral substitution of the FairTax for existing taxes would have
an immediate and powerful impact on the level of economic activity. GDP
would increase by almost 10.5 percent in the first year."[4]
Laurence Kotlikoff of Boston University found that implementation of the proposed
tax reform plan "raises the economy's capital stock by 42 percent,
its labor supply by 4 percent, its output by 12 percent, and its real
wage rate by 8 percent. It also lowers real interest rates by more than
one quarter."[5] [1]
"Federal Tax Compliance Costs Climb to $225," Tax Features,
Tax Foundation, March 1996, p. 3.
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