How The Small-Business Owner Gets Clobbered

By Adam Zagorin/Washington

DAVE GOODRICH, WHO OWNS PART OF a small real estate firm in downtown Indianapolis, Indiana, ought to be happy right now. Thanks to the steady decline in mortgage rates, his business is growing rapidly. The company has nearly doubled its work force since 1986, while reinvesting roughly two-thirds of profits in new equipment and office space. But Goodrich worries a lot. His fear: a deficit-reduction package that will clobber many small firms like his. "This is a job-creating company that the government should help, not penalize," he complains. "I'd rather have Bush's recession than Clinton's tax increases."

Goodrich has plenty of company. Last week, after thousands of entrepreneurs unleashed a torrent of protest letters and faxes on Capitol Hill, President Clinton scrambled to offer reassurance. "Unless we are firmly committed to small-business growth, we cannot succeed as a country," he said in a hurriedly arranged appearance before a group of small-company executives. His message did little to silence their gripes, most notably the complaint that provisions in the House and Senate tax bills designed to soak the rich will drown small enterprises. That is because about 80% of businesses in the U.S. pay taxes at the same rate as individuals rather than corporations. While big companies will see their income taxes rise just 1 percentage point, from 34% to 35%, prosperous small firms assessed at the individual rate will be hit with an increase from the current 31% to almost 40% in the top bracket. "Crazy as it sounds," says Jerry Jasinowski, president of the National Association of Manufacturers, "many small businesses will pay a higher effective tax rate than FORTUNE 500 corporations."

Entrepreneurs say the fallout is likely to hurt the whole economy, because in recent years America's 20 million small businesses have typically grown much faster than the big ones. Little companies currently employ 53% of the total U.S. work force, and during the past half-decade created virtually all net new jobs. Writes Michael Boskin, former chief economic adviser to President George Bush: "The large increase in tax rates on small businesses will reduce their after-tax profits, a primary source of funds for business expansion in the sector of the economy that creates most jobs."

Small-business lobbyists supported the initial Clinton budget plan because it contained many incentives, including a capital-gains tax cut for investment in small firms, a permanent investment credit and tax breaks for hiring workers in poor neighborhoods. Many of those provisions were missing in the House or Senate version. However, both plans did increase a small-business write-off for plant and equipment purchases, from $10,000 a year to $25,000 in the House plan and to $20,500 in the Senate's.

The last chance for revision will be in the House-Senate conference committee, where differences between the two bills will be reconciled. If small business fails to get a boost, it will mainly be testament to the lobbying clout of Big Business, which managed to escape its share of the burden by holding down corporate taxes and ducking the higher energy levies that Clinton had proposed. "We were done in on Capitol Hill," Bennie Thayer, chairman of the National Association for the Self-Employed, told a reporter. "Big Business once again got its way."