The past, present, and future of small business tax preferences

To foster economic growth in specific areas, the government every so often grants direct and indirect subsidies to encourage activities. This dissertation is a historical analysis of indirect subsidies granted to small business through the tax code. The first chapter analyzes the political, economic and public atmosphere that surrounded the creation of the biggest small business tax preference and the first hybrid entity- The S Corporation. Through archival research, the study constructed a story by which three major factors paved the way for the creation of the S Corporation: a genuine economic need to aid small business entrepreneurs in times of recession, strong political pressure from the business sector, and political elite who thought the moment was right to aid small concerns. The second chapter is an empirical study that measures how different size corporations take advantage of the government's indirect subsidies in various ways. This study demonstrates that small corporations make use of some tax breaks more than medium and large firms do. Specifically, the average effective tax rates for small businesses (what they actually paid) are lower than those of other size corporations. The third and last chapter of the dissertation analyzes these results and asks what affects the utilization rate of business tax breaks? Why is it that over the course of many decades, small businesses have taken more advantage of some tax breaks than mid-size and large corporations have? This chapter looks at the historical supply of indirect subsidies and tax breaks offered to small firms compared to those offered to other size corporations, and the justifications given throughout history for the persistence of small business subsidies. It conveys the idea that small business tax incentives were not justified by economic factors alone. They were equally if not more supported by the growing influence and political power that small business has acquired over the years.