NCPA - National Center for Policy Analysis


April 15, 2005

Small businesses are a source of innovation and risk-taking that is important to economic growth. They're the testing ground for new products, new technologies, new internal forms of organization and new locations. Others follow their mistakes, leading to general increases in productivity, according to a report by the U.S. Department of the Treasury.

Today, small businesses supply the bulk of American jobs:

  • Small businesses employ over half the labor force and create approximately 7 out of 10 new jobs.
  • Over the past decade, between 60 percent and 75 percent of annual employment growth has come from small businesses.
  • By some estimates, small businesses generate 52 percent of the gross domestic product (GDP).
  • Patents by small firms were cited in subsequent patent applications 28 percent more often than patents by larger firms.

As such, lawmakers should be sensitive to the effects of taxation on small businesses. For example, lower tax rates encourage small businesses to hire more workers and pay them higher wages. They also encourage entrepreneurs to invest more and increase the pace at which firms grow, says Treasury.

Source: "Fact Sheet: The Tax Burden on Investment and Entrepreneurship," U.S. Department of the Treasury, Office of Tax Analysis, March 11, 2005.

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