Tax Reform & Investment Key to Small Business Success

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Capitol Hill is waiting with anticipation for House Ways and Means Committee Chairman Kevin Brady (R-Texas) to release his tax reform blueprint sometime next month. With a bad economy further slowing, as noted in the latest release on GDP, the first serious step for tax reform will be most welcome.

And given that this recovery has so badly under-performed due to a lack of sufficient private-sector investment, a commitment to comprehensive tax reform that enhances incentives for entrepreneurship and investment is vital.

Consider a recent report from the American Council for Capital Formation (ACCF) that highlighted a disturbing falloff in capital formation, that is, in plant, equipment, technology and so on. When it comes to the United States' recent track record, we don't stack up well against our global competitors. According to ACCF, "Domestic capital formation not only declined over time, but compared unfavorably relative to our top ten trading partners. . . . the U.S. [is] lagging behind all countries except the U.K. in gross fixed capital formation as a percent of GDP for 2007-2014 period."

And while access to financial capital is vital for entrepreneurs seeking to start up, operate or expand their businesses, it also remains a continuing challenge. As a result of the financial crisis and the recession, capital became increasingly hard to access from banks, and both venture capital and angel investors. And while there have been improvements, many entrepreneurs still struggle to find the financial capital needed to compete and grow.

Last month, I testified before the House Subcommittee on Capital Markets and Government Sponsored Enterprises, and noted the decline in small business loans in recent years. In 2008, the value of small business loans outstanding hit a high of $711.5 billion, but subsequently fell for five straight years with slight growth resuming in 2014 and 2015. In the end, the 2015 level clocked in at $595.3 billion, roughly the same level as 2005. For those keeping track, that's a decade of no growth.

Our current federal tax policies aren't helping the situation. As ACCF put it, tax policies, along with spending and regulatory policies, "may interfere with capital formation and diminish the prospects for economic growth to the extent that they create a different level and distribution of capital goods than would have otherwise existed."

Comprehensive tax reform would go a long way toward improving matters. Our current corporate and personal tax code is an anti-growth, complicated mess. Tax reform must be guided by sound economics, not convenient politics. Doing otherwise would be counterproductive.

For instance, rather than targeting certain tax provisions that critics incorrectly claim favor specific industries - such as the Section 199 Domestic Manufacturer's Deduction - neutral tax policies should be the objective for lawmakers undertaking this enormous task. Singling out one industry over another with punitive taxes will not get the nation to what should be the ultimate goal: a productive tax reform policy that encourages investment, savings and entrepreneurship.

This is especially important for the nation's small businesses that have long been the backbone of our economy, playing an essential role in economic growth, job creation and innovation. The nation cannot afford tax policies that stifle entrepreneurship and investment.

Chairman Brady recently said Congress is in "the last two miles" of a 30-year tax reform marathon. With Republicans and Democrats alike recognizing the need for tax reform, let's hope both parties can find common ground and finish the race the right way - with a simplified, pro-growth plan that cuts tax rates, and reduces burdens on entrepreneurship and investment.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.  

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