In announcing his $674 billion economic plan in early January, President Bush took pains to emphasize that the proposal would benefit small-business owners--many of whom, Republican political strategists say, led crucial get-out-the-vote efforts in November's election. Standing in front of a massive American flag before employees of National Capital Flag Co., a small Virginia flag manufacturer that outfits the presidential limousine, Bush vowed that his plan would not only generally boost the American economy, but also specifically help small businesses win consumers, buy new equipment and hire more staff. Amidst cheers from the flag-maker's employees, Bush told the crowd, "I want people who need to put bread and food on the table to be able to do so."
Yet despite the president's promise, economists and tax specialists are divided on whether Bush's proposal actually will help small businesses. Some are convinced the Bush plan will provide vital help to small-business owners by boosting consumer spending in the short term and reducing small firms' long-term tax burdens. But others believe the incentives Bush is offering to small businesses will have minimal impact and could be outweighed by the potential negative impacts of the plan. These opponents wonder whether a competing economic plan offered by congressional Democrats, which focuses more on short-term stimulus, might provide more assistance to entrepreneurs.
Some Relief to Small
The Bush plan clearly contains some short-term investment incentives specifically designed to aid entrepreneurs. The plan would allow small businesses to write off up to $75,000 worth of new-equipment purchases, three times the current exemption.
The White House estimates that with the higher write-offs, millions of small-business owners nationwide would save more than $2,000 in taxes annually when buying new equipment. This higher write-off, analysts say, would allow proactive entrepreneurs to make bold, new purchases and innovations, effectively rewarding smart businesspeople willing to take calculated risks. (After Bush's speech, National Capital Flag Co. owner Al Ulmer Jr. said the higher limit would help him buy two new pieces of equipment.) Large and small companies alike now will have more incentives to make more purchases, including buying items they may have put off, says Michael G. Zey, a futurist specializing in economic and technology trends and a professor at Montclair State University in Upper Montclair, New Jersey. In many cases, the bigger firms may be buying from smaller subcontractors.
Though the president has spent considerable time talking about the technology/capital exemption, the write-off constitutes the least expensive part of the economic plan. Over the long run, other components of Bush's plan might help small businesses more than the exemption. For one, the Bush plan would eliminate taxes on stock dividends for individual shareholders, a bold move that could goose the stock market since dividends would be tax-free, and could make Americans feel more comfortable about their investments, propelling them to spend more. "The Bush tax plan, by eliminating taxation of dividends, is a momentous change--a stroke that shows Wall Street and average Americans the administration is focused on economic policy," says Edward Hudgins, Washington, DC, director of The Objectivist Center, a free market-oriented research organization. "More confidence leads to a healthier stock market and the 'wealth effect,' where higher stock prices make people feel richer, and we get more consumer consumption, which is what small businesses need to boost profits and provide jobs." Indeed, the White House believes its elimination of dividend taxes, combined with other measures, will spur the creation of more than 2 million jobs over the next three years.
What's more, argues David DeRosa, president of DeRosa Research & Trading Inc., a securities research firm in New Canaan, Connecticut, eliminating dividends will be a huge boon for retirees. Today, roughly half of all dividend income goes to seniors. Accordingly, small businesses located in regions with large numbers of retirees could find consumer consumption rising even more.
Some businesspeople believe eliminating taxes on dividend income will benefit entrepreneurs in other ways. Bush's plan would allow small businesses, most of which now incorporate as sole proprietorships rather than as C corporations, to become corporations and start paying themselves dividends. If dividend taxation ends, these C corporations could make more money by realizing bigger profits and dividends and paying themselves a lesser salary, since the taxes on the profits/dividends will be less than their personal income taxes.
Most important, say advocates of Bush's proposal, the president's plan would accelerate to 2003 previously approved personal income tax cuts scheduled for 2006 and would reduce the marginal tax rate on the top income bracket. These potential income tax reductions are much more important to entrepreneurs than to large corporations. "It's easy to miss this point, because the media doesn't focus on it much, but almost 90 percent of small businesses pay personal income taxes rather than corporate income taxes," says Darrell McKigney, president of the Small Business Survival Committee (SBSC), a Washington, DC, advocacy organization. "So personal income tax relief directly impacts their bottom line."