Don't tax small business out of picture

Eight years ago, when Intertech made the list of the 500 fastest-growing firms in the country, my young nephew noted: "I knew Uncle Tom had money, but I didn't know he was a millionaire."

That story, which ran in the Star Tribune, reported that Intertech's sales were just more than $2 million. Despite my nephew's false impression, my wife and I were not millionaires. We just own a company with gross sales in the millions, and that is an important distinction. Sales aren't profit.

And today's profits fund tomorrow's growth. For my nephew, who was 11 at the time, it was an understandable mistake. Even adults can get the numbers screwed up. What's perplexing is how someone who is Harvard-educated could be making similar mistakes. I'm talking about President-elect Barack Obama's proposed tax strategy.

Throughout the election, Obama talked about supporting small business, keeping high-paying jobs in America, and fostering growth in jobs and innovation. Along with this, he had a clear message of tax increases for those who earn more than $250,000 a year. I'm one of those people. While there's no doubt that $250,000 is a lot of money, there is considerable misunderstanding about what that money means when you're running a small business.

I founded and work for Intertech, a software development and training firm that is organized as an "S corporation" for tax purposes. Like the other 35 employees at Intertech, every other week I receive a paycheck. At the end of the year, when taxes are due, Intertech's profit is reported on my personal tax return. While I pay tax on this profit -- at the current rate of 40 percent -- the bulk of the profit remains with the firm. This retained profit covers payroll and some short-term financing. But most important, retained profit funds Intertech's growth.

Growing firms need cash

A growing company consumes cash -- lots of cash. Think of growing companies as "gazelles," which is a term applied to firms growing at the rate of 20 percent a year. With the economy in its current distressing condition, I believe we need gazelles more than ever. Gazelles represent only 3 to 4 percent of all "small" businesses. These are the firms that generate most of the net new jobs in an economy. They also drive innovation.

Until recently, the United States has been a haven for growth firms. But more recently, we have been experiencing "death by a thousand cuts." From health care costs to our tax structure, we are facing increasing international competition to attract and keep gazelles.

Part of it is our own fault. Gazelles are not organized, like unions. Nor do we have paid lobbyists, like big business. Because of this, I believe, we carry an unequal burden of our country's costs.

Two-thirds of small-business profits are earned in households making more than $250,000 per year -- part of that 5 percent of the tax base where Obama sees low-hanging fruit. It might sound like a good idea to help the other 95 percent of U.S. taxpayers by increasing taxes only on the remaining 5 percent, except for one compelling reason: The bulk of profits, job growth and innovation (our main competitive weapon) comes from about 500,000 midsize firms included in that group.

Some modest proposals

These same firms will be hit most directly by Obama's tax proposals if they are carried out as he described them in the campaign. For us, we'll see another 40 percent increase in our taxes (between Obama's proposed increases in the top two tax brackets, along with his proposed increases in Medicare and Social Security taxes paid by businesses).

Keep in mind that today roughly 40 percent of my earnings goes to taxes -- so with these proposed changes, more than half of every dollar of profit will be eaten up by taxes.

I would like to propose that our new president instead consider the following:

• As a gazelle operating in one of the most uncertain economic times in our history, I don't need more expense through higher taxes. I don't want a handout, either. Gazelles don't need bailouts or rescues. Necessity is the mother of invention. While times are uncertain, it is in these very times that we work harder, think harder and force ourselves to work "out of the box." This makes us stronger as individual companies and also stronger as a nation.

• At a government level, we need to shore up spending. I believe a business fallacy can be thinking that we'll grow out of a problem through more sales. It usually isn't that simple. While it may be painful and unpopular, we need to get our nation's checking account back in balance. The federal budget and deficit are well beyond my ability to understand. That said, if I ran my company the way we run our country, we'd be out of business.

• Our government should be a huge conduit between our universities and business to commercialize innovation already occurring within what undisputedly are the best universities in the world.

• We should keep an important part of the economic stimulus package that Congress passed this year, which allows companies to write off expenses of as much as $250,000 (IRS Section 179 regarding expense accelerated schedules). This provision gives companies a major incentive to invest in our organizations now and, most critically, get dollars circulating in the economy. Previously, companies had to amortize the value of investments over a multiyear period. Allowing companies to realize the full tax benefit in the year the investment is made is a powerful incentive for those firms struggling to stay viable in this weak and uncertain economy.

The new president has a lot of heavy lifting to do to get our economy moving again. As business leaders, we bear responsibility, too. No matter whom you voted for in November, it's clear that many people in the United States and around the world are tremendously excited about the change that Obama represents. So, even though I'm urging him to tread lightly on the gazelles, I'm hopeful about the shift in world opinion toward our country, which puts all Americans in a better position.