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Are small businesses losing ground to corporations?
A new analysis of data indicates that in the economic recovery, the profit gap may be widening between corporations and small businesses.

The economy is sending mixed signals about whether small businesses are truly recovering from the downturn of recent years. Here’s another reason for pause: The Bureau of Economic Analysis recently released its quarterly snapshot of corporate profits as a percentage of U.S. gross domestic product (GDP). Ed Dolan, an economist and writer of Ed Dolan’s Econ Blog, analyzed the numbers and compared it with other data sources. He discovered that while corporate profits have jumped nicely in recent years, the income of proprietors-unincorporated business owners that have legal forms of proprietorship, partnerships and tax-hasn’t kept pace.

According to his analysis, corporate profits reached an all-time high of 12.74 percent of GDP in the fourth quarter of 2011 and have remained pretty elevated ever since. Proprietors’ income, on the other hand, has climbed slowly since the financial crisis that sent markets tanking in late 2008. But at 7.9 percent of GDP, proprietor income is still quite below the 8.8 percent peak it reached in 2004. In the 1990s, Dolan notes, corporate and proprietorships “rarely differed by as much as two percent of GDP.”

He points out that the data sets aren’t an apples-to-apples comparison. Proprietors’ income, for example, is not a pure measure of profits because it includes the imputed income of the small-business owners. However, the data does suggest that small businesses have lost ground to large corporations.

Another indication: Businesses with more than 1,000 employees have grown in number, while those with fewer have stagnated in number. “It seems that big businesses are not only growing in size, but are generating more profit per worker as they do so,” Dolan writes.

So, given the unremarkable “small-business recovery,” what can be done to give small companies a boost in today’s economy? For starters, Dolan recommends abolishing the corporate tax that allows owners to take advantage of preferential individual income tax rates and “tax all capital income at ordinary rates when it is received by owners.” Second, he recommends removing the burden of health insurance coverage on employers, which is particularly hurtful to small businesses that pay more per employee for their policies.

The problems, he says, often stem from policies that inherently favor larger businesses and deter people from starting small businesses or even going to work for them. “In my view, the proper approach would be to level the playing field by ensuring that laws affect all firms equally regardless of size or legal form of organization.”

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