Friday, March 22, 2013

Too Small to Succeed

Congress and the President passed their version of financial reform in the Dodd-Frank bill. This bill, to the chagrin of many, does not fix “too big to fail”. Large financial institutions will continue to be bailed out if it is deemed they are too big and their failure will hurt the economy. However, one thing Dodd-Frank and other Obama policies do guarantee is that small businesses will have a tough time succeeding.

Small businesses do not have the funds to lobby Congress for waivers to bad laws such as ObamaCare or to get favorable representation in these bills. For instance, union employees are exempt to many provisions of ObamaCare such as the luxury health insurance tax.

Large companies that trade on the stock exchange are backed by the public and they are provided favorable tax exemptions. For instance, Whirlpool does not have to pay any income tax because they meet “green” tax incentives and exemptions. General Electric can claim massive profits from overseas units that are exempt from U.S. taxes. In other words, large companies can find loopholes to circumvent high U.S. taxes and they have less to risk because they are publically owned. On the other hand, small businesses are stuck with all the risk as well as high U.S. tax rates.

Large and global companies can also seek lower manufacturing prices and conduct businesses in countries where regulations are not as anti-business. In the U.S. for instance, environmental regulations are very anti-business because they drive up energy costs. Small businesses do not have the luxury of going global.

The Obama administration invests in some green companies but not others. They pick winners and losers and the winners are usually companies that invest in Obama’s campaign. Meaning, you must have money to get favorable treatment from the government.

Many small businesses claim their profits as ordinary income. And income does not mean wealth. This is a big misconception about taxes. A person that is considered living in poverty may actually be wealthy and a person with a high income may actually be poor. Income is how much money a person makes in a year. Income does not take into account how much savings or debt a person has. Hence, a person who created a small business and still has a huge student loan and business debt can be taxed at a very high rate. On the other hand, a retired person can live on a small income because they have no debt and can have millions in savings, but can be seen as living in poverty and pay no income tax. This is why taxing people on income and not wealth is very misleading. And this why it is hard for small businesses to succeed and overcome the debt and financial risk they must endure to start a business.

The bottom line is those companies that will succeed are big and have deep pockets. Small businesses that must overcome large debts are more than likely going to fail. In fact, the smaller the business (in terms of employees), the higher the chances that the business will fail. And new regulations, rules, mandates, and laws such as Dodd-Frank and ObamaCare will make small companies highly unlikely to succeed.

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