Travails of the Entrepreneurial Ant: Reforming Tax-Favored Retirement Saving for Small Business Owners
75 Pages Posted: 18 Jul 2000
Abstract
This article addresses an important public issue ? retirement security ? for self-employed small business owners. Although some in this cohort enjoy conspicuous affluence, many self-employed people ? such as shopkeepers, farmers, restaurateurs, and building contractors ? have modest incomes. They earn a living much like their employee counterparts, but without the security of employer-provided benefits.
Current law allows the self-employed to establish retirement saving plans for themselves and their employees on a similar basis as larger employers. However, those plans fail to take into account practical constraints on participation, particularly capital formation demands. Small business owners often struggle to accumulate the capital needed to start their businesses and keep them competitive. They are savers, but their form of saving does not obtain the same tax-favored status as a retirement saving plan.
The article starts with a basic discussion of retirement savings options and the economic benefits of tax-favored saving. It then discusses empirical data showing limited participation in retirement savings by small businesses generally, and more particularly by self-employed business owners. It explains that tax benefits received from business investment are not equivalent to tax benefits from retirement saving, and it shows how current rules contribute to a "lock-in" effect that limits efficient redeployment of business assets. The article discusses reforms to enhance retirement security and efficient deployment of business assets, including: (1) expanding options to access funds through loans; (2) changing the income tax base for contributions to include gains from the sale of business property; and (3) allowing additional contributions to tax-favored plans, up to a defined maximum balance, for those selling businesses in transition to retirement.
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