Why Aren’t Small Business Owners Treated Like Olympians?

We all applaud our Olympians who have done us proud. Their countless hours of hard work and personal sacrifice have paid off in their athletic achievement. Winners have been rewarded with fame (their names are in the record books) as well as medals and cash prizes from the U.S. Olympic Committee (e.g., $25,000 for a gold medalist). Under federal tax law, prizes and awards are fully taxable. Now there is a bill entitled the Olympian Tax Elimination Act in Congress (proposed by a Republican Senator and supported by the Democrat President) that would exempt the winnings from income tax. Is this the right thing to do?

Tax law by pet project
One of the reasons why the tax law is so complex is that it’s a patchwork of special rules to serve certain causes, special interests, and objectives. Let’s become energy independent (the objective), so let’s give tax credits for energy-related activities. Let’s help the housing market (the objective), so let’s create a first-time homebuyer credit. Let’s support NASCAR racing (the special interest) with a faster depreciation recovery period for motorsport racing track facilities. It seems that special interests with sufficient lobbying funds can effectively buy tax breaks in many cases.

Special tax breaks for small businesses

So my special interest is small business. What’s in it for me? All of the so-called incentives for small businesses, such as the health insurance tax credit for small employers, could be viewed as gimmicks. They appear to support small business. They appear to provide special help for the small business sector. And they do cut taxes for those who qualify. But the reality is that the small business tax breaks provide inadequate tax savings to incentivize action.

The health insurance credit, for example, does not underwrite the cost of providing health coverage for employees. I have not met one small business owner who took any health insurance action based on the credit. What’s more, in many cases, the paperwork and audit exposure for using various tax breaks is more costly than the tax savings. So special tax breaks for small businesses are rather illusory.

Tax-free treatment for small business winnings?
Would anyone suggest that profits earned by small businesses should be tax free? Don’t small business owners put in countless hours of hard work and personal sacrifice on behalf of their companies? There are no record books or medals for small business owners who succeed. And there is no tax-free treatment for small business winnings.

Bottom line
The tax law should be (or try to become) more neutral in its treatment of earnings of individuals. The tax law should not be picking winners. I admire the Olympic athletes, but I can’t support enactment of a new tax break for them.

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