For the past seven years, our federal government has been on a debt-and-deficit binge.

What has financed this binge is an ill-conceived policy of offering massive incentives to big businesses, which in turn have done little to create shareholder wealth or good-paying jobs.
We have handed out lucrative contracts to defense firms, massive subsidies to home builders and banks in the form of low interest rates and reduced capital gains and income tax rates for all. More recently we’ve added another subsidy – Federal Reserve “backstops” for Wall Street’s banking and investment banking system.

It seems that our candidates offer very little in the way of substance for dealing with this mess.
Sen. John McCain, R-Ariz., would simply keep most Bush administration tax rates in place and bet that deficits would take care of themselves.

Sen. Barack Obama, D-Ill., would sharply raise taxes on the highest-paid executives and increase capital gains tax rates, a step that could raise revenue but could put our shaky economy at greater risk of recession.

This column argues that both parties need to take a look at the most-overlooked and most important group of taxpayers when it comes to keeping our economy healthy – small business owners.

Small business owners have paid a huge price for the mistakes of our big banking giants – thanks to their mismanagement, we face a credit squeeze that’s brought America’s job generating machine to a screeching halt.

Just so you know, we also are facing increased regulation of the workplace, higher health care costs and a general price squeeze as inflation creeps into the overall economy.

With most polls too close to call, it may just be that the first presidential candidate who finds a message on taxes and the economy that really rings true with small business will get a huge competitive advantage in November.

That’s why this column is proposing a common sense approach to job growth by exempting the first $5 million, in stages, in long-term capital gains for any business sold after Jan. 1, 2010.

In order to encourage new business starts and job creation, capital gains would be exempted in stages – $1 million after the first year, $2 million after the second year, and so forth until the $5 million mark is reached.

The capital gains exemption could easily be financed with increases in capital gains for larger companies or a tweak to tax rates for people earning over $1 million. But such tweaks may not be necessary.

A big carrot for creating new small businesses will inevitably lead to the creation of millions of new jobs and new technologies in important areas such as energy, biotechnology and nanotechnology.

The government will not have to spend billions to pick winners and subsidize them – anybody with a better idea that can get financing will benefit.

This idea will not be popular with big businesses, who will fight hard to keep their subsidies. It will not be popular with large labor unions that do not want to see their ranks dwindle further as employees at General Motors or the local Wal-Mart leave their jobs in pursuit of the American Dream.

And inevitably there will be the unintended consequences of big companies spinning off smaller companies just to take advantage of the tax rate.

But creating a big incentive for American workers to strike out on their own, create new companies and new jobs is precisely what we need at this time to persuade workers to leave their regular paychecks and benefits behind.

It would provide motivation to get retired workers to dust off ideas and bring them to market – or rejoin the workforce at a new company where they can invest and create wealth with limited tax consequences.

More than anything else, America needs to unshackle the spirit of enterprise that has always been part of our small business culture.

A big break on capital gains would keep that spirit healthy and alive even as we tackle our looming debt and deficit problems.

• Henry Dubroff can be reached by
e-mail at hdubroff@pacbiztimes.com.

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