SMALL BUSINESS

Tax Relief Is the No. 1 Need

THE backbone of the U.S. economy is made up of small businesses--they account for some 4,000,000 of the 4,250,000 U.S. firms-Yet small business is in deep trouble. While big businesses are getting bigger and taking a fatter share of the market, small companies are shackled in their attempts to grow by heavy--and often discriminating--taxes. Wrote Florida's Democratic Senator George Smathers to President Eisenhower last week, inp eading for the creation of a Cabinet-ranking Secretary of Small Business: "Every single barometer indicates a general worsening of conditions for smaller firms. Time is running out for the small businessman."

The Small Business Administration defines a small business as a retailer with annual sales of not more than $1,000,000, or a wholesaler with sales of $5,000,000 or less; Washington wags describe it as one that cannot afford to keep a lobbyist in the capital. Actually, the facts speak more eloquently on behalf of the troubled small businessman than any lobbyist could. More small concerns went out of business last year than in any year since 1940; bankruptcies this year are running higher than in 1956. Small business' share of total manufacturing sales slipped from 18.9% in 1947 to 12.3% in 1956.

The mortality rate for new businesses has always been high--largely because of mismanagement and inexperience. But the fact that business failures since 1947 have doubled among firms ten years old and older indicates that taxes are now the real trouble. After paying the Government 30% of earnings under $25,000 and 52% over it small firms have proportionately far less than bigger companies to use for expansion. To escape extinction, more and more smaller firms are forced to merge with bigger companies, thus accelerating the trend towards monopoly. Faced with these facts, almost everyone in Washington agrees that small businessmen deserve a better break.

The most direct help would be an overall tax cut. Both Democratic and Republican Congressmen have introduced measures to aid smaller firms either by raising the profit point at which the 52% corporate tax rate becomes effective, or lowering the tax rate for profits under $25,000. A Cabinet committee appointed by the President recommended a cut from 30% to 20% for corporations with earnings of less than $25,000. But the Administration, harking to Treasury Secretary George Humphrey's firm opposi tion to tax changes involving more than a "minimum" revenue loss, has so far regarded direct tax cuts as too expensive. Moreover, corporate tax cuts would not benefit some 85% of small concerns that are not incorporated, now pay their taxes on a steeply graduated individual tax scale.

Corporate and individual income taxes are only part of a small businessman's tax troubles. There are many other taxes that often discriminate against him in favor of big business. For example, many small companies with limited capital are forced to buy used equipment or old buildings, but must depreciate their investment for tax purposes at a less favorable rate than permitted for the new equipment big companies can afford to buy. Worst of all, inheritance taxes are so stiff that the heirs of many small family-owned businesses are often forced to sell off their holdings at distress prices, or are left without sufficient capital to continue operating.

Since an overall tax cut seems out of the question, members of both parties in Congress, and the Administration itself, are backing measures to give the small businessman tax relief in at least these areas. The Administration hopes to present its proposals to Congress shortly. Among the remedies: 1) spread the payment of estate taxes over a ten-year period for all small firms, 2) give small firms the right to depreciate used equipment for tax purposes at the more rapid rate allowed for new equipment, 3) permit closely held corporations with no more than ten stockholders to be taxed at the partnership rate when it is less than the corporate rate, while continuing to take advantage of the corporation's limited liability features.

Such relief measures are probably the most that the small businessman can hope for in the near future. Congressional experts calculate that they would cost the Government some $200 million in tax revenues, but the Treasury puts the loss much higher--at $500 million. In any case, the tax loss would probably not be permanent; many of the payments, such as on inheritance taxes, would only be deferred. Actually, cutting the taxes on small business might well increase the overall tax take, since it would give small businessmen cash to expand. Thus, as the President's Cabinet committee pointed out, the measures would "tend to enlarge the national income, which is the ultimate source of all tax revenues."

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