Protecting the entrepreneurial dream

Comprehensive tax reform requires difficult decisions and compromise, and small business owners are willing to accept significant changes for a system that is simple and pro-growth. The process and bipartisan tone established by House Ways and Means Chairman Dave Camp (R-Mich.) and Ranking Member Sanders Levin (D-Mich.) gives small businesses hope that something can actually happen in this Congress. Thankfully, their efforts have focused a great deal on small businesses and entrepreneurs, and for good reason. The U.S. needs more startups and high-growth businesses in order to create more jobs. Job growth has been weak, and so has entrepreneurship.  Although the numbers have improved somewhat, entrepreneurship dipped to its lowest level a couple of years ago. Tax reform can strengthen the comeback and sustain entrepreneurship for the long term.

Fundamental tax reform must protect small businesses and provide them with the opportunity to succeed. Proposals and reform ideas cannot mask new taxes that work against the fundamentals of capital access and entrepreneurship. And while small business owners have been the most ardent supporters of tax reform, they will quickly recognize the difference between reform efforts that are fair, and those that may do more harm than good. A new tax that targets a legitimate business expense and raises the cost of capital will be harmful.

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For 100 years, businesses have deducted interest expenses from their taxable income. Debt is a part of a firm’s normal operations and interest on debt is a cost of doing business. Certainly, tax reform should tackle “loopholes” and unnecessary deductions that litter the code, but it should not upend a legitimate business expense. Doing so could set a precedent for targeting other business expenses, which works against the fundamental fairness and certainty that entrepreneurs so desire.

A new tax on interest would raise the cost of business startup, expansion and investment. For entrepreneurs, this hit would come on top of other barriers, uncertainties and risks. Higher costs mean less investment, growth, and jobs. With more than 11 million people unemployed, including 4 million of which have been out of work for over 27 weeks, tax reform should focus on enabling businesses to grow, hire and take risks. It should not raise costs.

Some have argued that limiting interest deductibility would reduce distortions in the tax code that encourage too much borrowing. Too much?  Businesses take on debt when conditions and opportunities are ripe to scale up or expand. The market, the potential of the business, and economic conditions drive borrowing. Raising costs on these companies would certainly reduce borrowing.  Currently, businesses are not borrowing because of uncertainties, economic conditions and low confidence. The latest measure of the Thomson Reuters/PayNet Small Business Lending Index showed lending to small businesses falling during the first three months of this year. It’s hard to argue there is “too much” borrowing going on currently.  

Small businesses want and deserve the chance to prosper. Our economy needs that. Reforming the tax system is an essential step to creating a healthier entrepreneurial ecosystem. Creating new barriers and taxes that punish entrepreneurs for tapping into the capital they need to survive, grow and prosper would undermine the very purpose of reform.

Kerrigan is president and CEO of the Small Business & Entrepreneurship Council (SBE Council).