Are Small Business Owners Tax Cheats?
I remain a firm believer that small business is the backbone of the American economy. Not to discount the big businesses in this country that employ thousands of people, but any sizable recovery, if there is to be one, rests upon the success of small business.
Small business accounts for nearly half of all jobs, as well as GDP. But according to the IRS Taxpayer Advocate, Nina Olson, they are also this country's biggest tax cheats. This doesn't describe all small business owners, of course, but the IRS says that on average, small business owners are more likely to underpay their taxes than the average American. This is in sharp contrast to the popular opinion of small business owners, which typically rates higher than churches and religious organizations, and even higher than most colleges and universities.
Of the $385 billion tax gap (the amount of tax the US government is owed, less what it actually collects), $122 billion is estimated to be unreported business income on individual tax returns. Obviously, this comes from sole proprietorships. Many Americans run "side businesses" in addition to their regular income. Many of these "cash jobs" go unreported. This doesn't mean that businesses are inherently evil, or that more likely to hide their income from the IRS than the rest of the general public. It just means they're better at it. It's nearly impossible to hide income that is reported on a W2. But when your business transactions are conducted in cash, and without documentation such as invoices or receipts, it becomes much easer to hide.
While I never advocate hiding income from the IRS, it does strike me as demonstrative of one important point. Raising taxes on big business will not balance the budget. Although it has become popular to demonize big corporations, much of the tax gap is attributable to individuals running small business operations in their spare time.
Perhaps instead of raising taxes on big business, and encouraging them to take their headquarters overseas, we should just make the hard decisions to reduce spending, decrease the size of government, and made America a place that small business can thrive and prosper.
Just a thought.