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Rep. Hunter’s Stance Against Small-Business Taxes on the Right Track

Scott McGann: “Government agendas to increase regulatory oversight and impose higher taxes on businesses initially appear as noble intentions. .. Unfortunately, unintended consequences appear much later.”

Editor’s note:  This letter from a Grossmont College economics professor originally came as a response to a La Mesa Patch query regarding Rep. Duncan D. Hunter’s stance against federal taxes for small businesses.

To the editor:

First off, I would define a small business, generally, as one with fewer than 100 employees.

Duncan Hunter's suggestion is based on the idea that businesses internalize regulations and taxes as a cost of production; thus they either avoid the imposition by moving the business elsewhere (leave the country) or reduce the level of production to levels that maximize profits. 

This is a very realistic assumption, and a lack of understanding of the implications sometimes leads government to micromanage private enterprise to detriment of us all.

Government agendas to increase regulatory oversight and impose higher taxes on businesses initially appear as noble intentions protecting consumers, workers and others from self-interested decisions of entrepreneurs.

Unfortunately, the secondary, unintended, consequences appear much later. Less competition, higher prices, job losses and a lower standard of living for us all are the long-term result. 

Remember, for every dollar that is produced by U.S. industry approximately 70 cents returns to the workers in the form of new wages.  Less than 20 cents returns to the owners of the firm.

Workers are the primary beneficiaries of production. Sometime we lose sight of this fact as the profits, although less overall, get funneled to a smaller numbers of individuals than the wages.

Consequently the average income of wage earners is less than that of the owners of business. This, however, does not negate the fact that for every dollar produced workers win the most.

With this in mind, any regulation or tax that compromises production will have very profound consequences to the workers. 

Small businesses are particularly vulnerable to such impositions. In some cases, the increased costs created by taxation and regulation cannot be absorbed by small-scale operations. This causes some small businesses to abandon the endeavor altogether.

Keep in mind that the vast majority of businesses in this country are sole proprietorships that operate with a relatively small number of employees. When this burden hits them, many jobs will be eliminated.

Interestingly, quite a bit of government intervention has been spearheaded by big corporations who find the costs of compliance less than the benefits of eliminating their small-scale competitors.

Big corporations have mobility and can typically set up shop in a more business-friendly country. They have larger pools of resources to utilize Washington to their advantage through corporate welfare programs, bailouts and other special perks.

Small enterprise has none of these and is the true victim of oversight veiled as protecting society from the greedy corporations.

 In the end, our noble intentions must be balanced with a hard look at the long-term consequences of such government imposition.

Governments at all levels have the ability to demand businesses pay taxes and comply with regulation. But they can’t force someone to go or stay in business. Because of this, I agree that we should lower tax burdens, reduce regulations and the consequential costs, and reinvigorate the entrepreneurial spirit at the smallest level to advance his/her own position and all the workers he/she will employ. 

That is the way to long-term economic health and ultimate increases in incomes and government revenues. Our history proves it.

Scott McGann
Grossmont College economics professor

Kevin George November 14, 2011 at 08:02 PM
Excellent article Professor McGann. It is difficult for anyone who hasn't run a business to realize the deleterious power of regulation and taxes. Thank you.

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