Sunday, April 01, 2001

Tax cut? First pay down the debt

By Rhonda Abrams
Gannett News Service

        President Bush's tax proposals are moving through Congress. So it's important to ask: Are they good for small business?

        • Estate-tax rate reduction. This is important for small companies, especially long-established, family-owned businesses, to help ensure their continuity.

        But estate-tax reduction doesn't do anything to help encourage the formation of new companies or help growing companies.

        • Lowering individual tax rates. This looks like it helps lots of small businesses because a high percentage of business owners pay taxes at individual rates.

        But one of the biggest challenges facing small companies — whether a startup or not — is access to capital: getting money.

        That's why we've come to depend on Fed Chairman Alan Greenspan to lower interest rates. But there's a better way to lower interest rates: pay down the national debt.

$5 trillion infusion

        Here's how it works: If the government were to repay that debt, $5 trillion would become available to the rest of the economy.

        Having a lot more money available in the economy has two primary effects on small business:

        1. It reduces interest rates. Imagine the effect of a 2 percent to 3 percent interest rate on home buyers, consumers or private businesses. The lift to the economy would be enormous.

        2. Because investors wouldn't get as high of a return on other investments — such as certificates of deposits and bonds — investing in new companies seems more attractive. This means more money available for entrepreneurs.

        Yes, the president has said that paying down “all available debt” is part of his tax plan. But he cuts taxes first and back-loads the debt reduction. I'd like us to pay our national bills first.

        Even more worrisome is that once a tax package starts moving through Congress, special interests can't help but try to get their own tax breaks written in.

        So since special interests are inevitably going to have special provisions written into the tax package, I'm going to speak up for small business. (Excuse me while I slip on my Gucci loafers — the traditional attire of Washington lobbyists.)

        Here's my list for small business:

        1. 100 percent deductibility of medical insurance for the self-employed. The deduction is now 60 percent; corporations can deduct 100 percent of their employees' insurance. This is simply unfair.

        2. Increase in “expensing.” Most business equipment has to be depreciated over a number of years, but a limited amount may be “expensed,” or written off, in a single year. The amount is now $19,000. This should be increased to at least $35,000.

        3. Increase the deductibility of entertainment and meal expenses. While advertising and marketing expenses are 100 percent deductible, entertainment and meal expenses are only 50 percent deductible.

Free lunch

        For small companies, taking clients to lunch, attending a networking dinner or other entertainment functions are often their major marketing activities. Why allow a Fortune 500 company to write off 100 percent of a $10 million ad campaign and a small company to only write off 50 percent of a $25 lunch?

        In March 2000, the Republican-controlled House of Representatives voted for 100 percent medical-expense deductibility, $30,000 expensing and 60 percent meals/entertainment deductibility. They should pass those again.

        I've also got a couple new ideas of my own:

        • A tax credit for hiring your first employee. It's tough hiring your first employee. You discover a mound of paperwork, taxes and the emotional barriers. A one-time tax credit would be a good incentive.

        • Income Averaging. Farmers get to income average, and there's a proposal to allow fisherman to income average. But a wide variety of small industries are highly cyclical. Expanding the income averaging to small companies — not big business — that have widely fluctuating income cycles could be a big help.

        • A standard deduction for profitable one-person businesses. There are 15 million businesses with no other employees. A lot of these spend as much time on their paperwork as on their business. Let's figure out a modest standard deduction, and as long as they pay taxes, cut out the paperwork entirely.

        Rhonda Abrams is the author of The Successful Business Plan: Secrets and Strategies and Wear Clean Underwear: Business Wisdom from Mom. For free business tips, register at


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