Keep Helping Small Business

By Bizbox

Though we tend to be big fans of journalist and editor Michael Kinsley--he did, after all, found our sister site Slate--we're going to have to take grave issue with a post he recently wrote on The Daily Beast titled, "Quit Helping Small Business". In short: no, don't.

Apropos of the contretemps over The Most Famous Plumber Since Mario, Joe of Ohio (which we covered last week), Kinsley condemns the fuss that is made over small businesses each time an election rolls around: "Small businesses are businesses like any other, and small business owners are people just like others—except that they tend to be wealthier. Why should the magic words 'small business' entitle them to pay lower taxes?" While we're not necessarily against Sen. Barack Obama's plan to let expire the Bush tax cuts for those making over $250,000 per year (as contrasted with Sen. John McCain's plan to continue those cuts), we think Kinsley wrongly ignores and indeed unfairly disparages the vital and unique contribution that small businesses make to the U.S. economy, and therefore fails to see why the government ought to be making it just a little bit easier on them.

For one thing, small business owners do not "tend to be wealthier". Kinsley forgets what Obama himself said during the debate, and what the New York Times essentially confirmed: only 2% of small business owners make over $250,000 and would thereby not see tax cuts under an Obama presidency. And anyway, as Kinsley himself points out, "That $250,000 a year is the owner's net income, obviously, and not on the business's gross revenue." No one--neither Obama nor McCain--is asking that small business owners be treated differently for income tax purposes, and so it is weird that Kinsley goes out of his way to insist that, no, they shouldn't be so treated.

Kinsley's real beef is with small-business tax breaks, of the sort that we currently have in our tax system and that both candidates advocate continuing and even enhancing. (What would the two candidates do for small businesses? Our summary is here.) "There is no need to encourage risk-taking entrepreneurship with special tax breaks," Kinsley argues. "Risk takers will take risks, and if the risks work out they shouldn't mind paying the same level of taxes as everyone else. If the risks don't work out, they won't have to." This is, as Kinsley himself admits, the standard free-market argument: the alternative would be some sort of "industrial policy," that, history has proved over and over, doesn't work as well.

In fact, Kinsley could not be more correct that a free market is best at encouraging risk-taking. This is not a small point: risk-taking is how innovation comes about; and it is by cultivating innovation that a country attains (or, in the U.S.'s case, maintains) global economic leadership.

But tax breaks for small businesses don't distort the free market as far as risk-taking is concerned; they help to create it, and ensure it. If the a priori taxation playing field were perfectly level, then lone would-be entrepreneurs would have a massive disadvantage as compared to, say, employees at big corporations. What cares the salaried employee if he or she takes a risk? The paycheck will still be in the mail every two weeks. And what cares the big corporation if it pays people to take risks that don't always pay off? It can afford to pay 100 such people, and if only one comes through with a big idea, it still gets an ample return on its investment.

On the other hand, the lone entrepreneur with a big idea does not have a salary to fall back on, or 100 ideas and the time and money to test them. And so, with no incentives and no safety net, the lone entrepreneur may just decide to keep his or her idea in its drawing-room stage. Certainly he or she is going to be less likely to join a big corporation and develop the idea from within it, a gambit that provides stability but sacrifices the chance at an especially lucrative reward.

Tax breaks give this lone entrepreneur both the means and the incentive to strike out on his or her own, which in the long run and over the whole population is sure to increase the total number of innovations than if we didn't have them. And this is the reason--or, at least, a reason--why it is not wrong that there does exist some preferential treatment in federal government policy for small business owners.

Fortunately, Kinsley--who, really, we tend to be huge fans of!--isn't running for president. And the two guys who are both believe in the importance of continuing to encourage innovation by continuing to encourage small businesses.

Comments (3)

October 20, 2008 9:07 AM