What Lies Ahead for Small Business?

Unemployment, healthcare, and taxes are just some of the issues facing small business owners. Entrepreneurs across the country hope to receive their fair share of economic stimulus.

We have all heard that these are dangerous times, and it is true, but the real danger in them is to fail to seize the opportunities that only such a crisis can bring out. The opportunity that President Obama has before him with this recession is not, as some of his advisors would insist, a political one. Rather, it is an opportunity to put the United States on a road to true and lasting prosperity.

All of us here at America’s Best Companies ask that you, and the President, take a hard look at the economic landscape of America. You will see, as we do, that the lion’s share of our economy rests with small business, companies with fewer than 500 employees. Because of this, we believe that it only makes sense that the lion’s share of economic stimulus — if not now, then with the inevitable follow-up package — should go to the promotion of the small business sector of the American economy. As it stands, small business will see less than one percent of the total value of the stimulus, and that hardly reflects the contribution and importance of the small business sector to the overall health of the economy. After all, small business is both the backbone of our economy and, as far back as the first settlers and explorers from Europe, the foundation of our society.

The President said that he wanted a “post-partisan” presidency. Here is his chance to achieve that by turning away from ideology and focusing on true prosperity: The creation of real jobs and lasting employment by giving the small business sector the attention it deserves and, quite frankly, needs.

The Case for Small Business

The reason small business should command more attention is that it creates far more jobs in the American economy than larger businesses do. This is not rhetoric, this is a fact borne out by the 2007 SBA report to President Bush, The Small Business Economy. Consider the following [emphasis mine]:

For research purposes, the Office of Advocacy often defines a small business as one with fewer than 500 employees. By this definition, about half of the private sector employment and output is attributable to small businesses. In 2004, the most recent year for which firm size data are available, small businesses with fewer than 500 employees accounted for all of the net new jobs. Small firms had a net gain of 1.86 million new jobs, while large firms with 500 or more employees had a new loss of 181,000 jobs.

Small firms employed 50.9 percent of the private sector work force and generated 50.7 percent of the nonfarm private gross domestic product. This 500-employee threshold also means about 99.9 percent of employer businesses are small, and of course all nonemployer businesses are small. The size difference between the average small and large business was stark in 2004, according to the latest U.S. Census Bureau data. The mean small employer had one location and 10 employees, while the mean large employer had 62 locations and 3,313 employees. The median employer size was about 4 employees for small firms and 1,000 employees for large firms.

Prosperity comes when people are employed. Therefore, employment must be the true measure of prosperity since all other measures stem from that. Without employment, for example, we can have no Gross Domestic Product (GDP). We would have no product at all! With that in mind, we see that in small business, we have a sector of the economy that has provided:

• All of the job growth

• Half of the GDP

• Employment for over half of all Americans

• Nearly 100 percent of the businesses in the United States

It is, therefore, the entrepreneur and the venture capitalist who create jobs and on that point alone the support for small business should be expanded. Gross Domestic Product is another reason. By giving small business the tools it needs, this package could increase the small business side of the GDP, which, in turn, could jump start the big business side of the equation as larger firms are called upon to support more small business activities and outsource many of their functions back to the small business sector.

This can happen, but it cannot happen with the stimulus bill as it is currently written. There is more than a little ideological spending here. The new government cars are all to be “green” and there is really no economic stimulation associated with correct head counting, no matter how good and righteous the intent. On the plus side, maybe the “global warming” money will finally put that issue to rest. How does money for rich colleges equate to immediate job creation on Main Street? The same question goes for digital TV money. The list goes on but the question remains: How can these, and programs like them, bring prosperity back to America?

Small Business’ Slice of the Stimulus Pie

The truth is that those programs and programs like them may create work, but they do not create jobs. The work is, essentially, project-oriented. You need 100 people to build a Frisbee park. That is fine, as long as you are building the park. The real question is, how many of these jobs will be retained once said Frisbee park is finished? Certainly, none of the construction jobs will. Hopefully, these workers will find other projects. Many of them won’t. The ongoing jobs will go to the park district—city or county workers—for the maintenance and upkeep. The only things “private sector” about this and the myriad projects like it will be the people who use it and, maybe, the equipment suppliers.

What we need are programs that will inject liquidity into small business, loosen up credit and bolster the local economies in which small businesses thrive. Here is what we have so far, prior to passage of the Compromise Stimulus Bill:

Small Business Credit. The House bill asked for $430 million for new direct lending and loan guarantee authorities to make loans more attractive to lenders and free up capital. The number of loans guaranteed under the SBA’s 7(a) business loan program was down 57 percent in the first quarter of this year compared to last.

The Senate stimulus bill includes $515 million to temporarily eliminate fees associated with 7(a) loans in the hopes of stimulating as much as $15 billion in small business loans; $100 million for the temporary fee waivers on 504 loans, which provide long-term financing to small businesses that are expanding and need to buy equipment, facilities or other fixed assets; and funding for the SBA’s Microloan Program, which provides very small loans to qualifying small businesses. It includes $6 million to handle the increase in demand resulting from the credit crisis, which will leverage an additional $51 million in microloans, creating or retaining an estimated 10,000 jobs. The bill also provides $24 million for complementary counseling.

Oversight. To provide accountability, the Senate package contains $10 million for the SBA Inspector General’s oversight of SBA stimulus funds and $15 million for increased lender oversight.

Rural Business-Cooperative Service. $100 million for rural business grants and loans to guarantee $2 billion in loans for rural businesses at a time of unprecedented demand due to the credit crunch. Private sector lenders are increasingly turning to this program to help businesses get access to capital.

Industrial Technology Services. $100 million, including $70 million for the Technology Innovation Program to accelerate research in potentially revolutionary technologies with high job growth potential, and $30 million for the Manufacturing Extension Partnerships to help small and mid-size manufacturers compete globally by providing them with access to technology.

Economic Development Assistance. $250 million to address long-term economic distress in urban industrial cores and rural areas distributed based on need and ability to create jobs and attract private investment. EDA leverages $10 in private investments for $1 in federal funds.

Taxes. In summary, companies can defer taxes for five years on transactions aimed at restructuring balance sheets and repay the taxes over the following five years. Small businesses will be able to write off some investments from their taxes while larger businesses will get to more quickly deduct the cost of investments in plant and equipment from their taxable income. There are also changes to individual taxes that would affect business owners who report their business income on their personal tax returns.

Any one of these would be helpful, but even taken together, they do not meet the needs they are supposed to address. Combined, they represent less than one percent of the total stimulus package. To expect that little drop in the collective bucket to make a difference is unrealistic at best. The loan provisions are fine and there is some merit to the technology provisions, though they are really more of a gamble than anything else. The problems that must be addressed are taxes, regulation, and the encouragement of local economies.

Small Business and Taxes

Companies that get to keep more of their earnings invest more of those earnings back into the company. Doing so allows them to hire new workers and grow. Consumers who have more money in their pockets tend to spend it on businesses, supporting their growth and making it possible for them to create jobs. In return, they receive better service and goods for their own endeavors, both private and commercial. This is what creates jobs, the relationship between consumers and businesses, but to achieve this requires a real commitment on the part of government. It requires more than simple tax cuts. It requires deep and permanent cuts to the existing tax code, but the time will come when that 66,000 page behemoth will have to be eliminated and replaced with something that will be much more fair and equitable.

The current tax scheme concentrates taxes on the wealthiest people in our society, a very populist position but not a practical one. At the same time, it drops folks at the other end of the income spectrum from the tax rolls entirely and gives them a refund on taxes they do not pay. This creates dependency on government on the poor end of the spectrum, and retards the entrepreneurial spirit all around. With this scheme, fewer jobs can be created because money is flowing away from those who use their money to create jobs, and into the federal Treasury. Fewer businesses will be opened because there will be less reward for the hard work that goes into building a business and because, with more people dependent on government, the drive for personal achievement will be stunted.

What is needed is a simple and straightforward, broadly-based and reasonably flat tax structure, one that encourages wealth creation rather than simple wealth redistribution. This would free money belonging to those who create jobs and allow them to invest in profitable ventures. Doing this would also increase investor confidence since more money would be available and the one, main financial liability anyone regularly faces, their taxes, would be spread over more of the population.

That, however, would require a major change in the way taxes are calculated and collected. Until then, in addition to the measures outlined above, there are a number of basic things the government can do today to revitalize small business:

Corporate taxes. The U.S. has the second-highest corporate tax rate in the world, and to what end? Companies with money, just like people with money, have the ability to minimize their tax burden by a variety of means, including going off-shore. The taxes that companies pay must be lowered to a point where doing business in the U.S. is more attractive than doing business anywhere else.

Just as it would bring more jobs back to the United States, as companies find that it is cheaper to do business here, lowering corporate taxes would also attract more foreign companies to the United States, which would mean more jobs for Americans

This would help small business directly, by lowering their tax burden and encouraging reinvestment, but since any increase in employment equals an increase in consumers with disposable income, small business would benefit again as the pool of available customers increases.

Tax simplification. In June of 2008, a report was prepared by the staff of the Joint Committee of Taxation called Tax Reform: Selected Federal Tax Issues Relating to Small Business and Choice of Entity. The report was prepared for a public hearing of the Senate Committee on Finance and it holds the following suggestion:

Reduction in the number of different tax regimes for business entities arguably could achieve greater neutrality and greater simplicity. For example, if it were determined that fundamental non-tax distinctions between corporate-type entities, and non-corporate entities (such as public trading of interests) merit retention of the corporate tax regime, neutrality and simplicity might be improved by having only one other tax regime permitting single-level taxation of business entities. Such a regime for non-publicly traded entities might resemble the partnership regime in its ability to distinguish among labor income and capital income of partners and allocate such income in accordance with the nature of the partner’s interest in the partnership.

Single level taxation, also known as a flat tax system, was seen as a possibility only a year ago. Why not now? Simplification would not only lower the amount of time needed to prepare tax returns, it would also lower the cost of doing so, thus releasing into the economy money that would otherwise be spent in complex tax preparation.

Inheritance taxes. Small businesses are often built with an eye toward passing them along to the next generation. What often happens, though, is that the business and its assets have to be sold in order to pay the inheritance tax. This breaks up family businesses and often results in the business going under. By eliminating this tax, families can keep their businesses going, invest more in their business and build it.

The Alternative Minimum Tax. This tax is, at the heart of it, merely a way to get higher tax revenues from “the rich.” Never mind the fact that the threshold for the tax is constantly creeping down into lower income levels it was never intended to affect, the real problem is that this tax hits small business owners who, as in the case of the sole proprietor, channel their company’s income through their personal taxes. This is money that would be better spent on the business or for the needs of the entrepreneur’s family, which is the main reason that person went into business in the first place.

This kind of parallel taxation — the regular and the alternative — is inherently unfair, it punishes success and it drains money from business owners that could go into stimulating employment and commerce. It should be abolished.

Capital gains taxes. To encourage venture capital, a lowering of capital gains taxes on small business investment is advisable. Knowing that they would have a higher return on their investment would make such investments more attractive to potential venture capitalists. This would help to inject liquidity to the small business sector.

Personal income taxes. Again, lower taxes mean more disposable income and that means more money in circulation. This is important since there is so little else for small business in the stimulus plan. Yes, there will likely be a period of debt elimination and savings, but it cannot be emphasized enough that consumer spending is vital if small businesses are to recover and thrive and the best way to see that happen is to make sure that there is significantly more money available for consumers, far more than the $13 per week that will come from the current stimulus plan.

Card-Check. This rule will prove ruinous for many small businesses by raising payroll and benefit costs — the cost of doing business — far beyond their reach. This would harm local commerce, raise unemployment and have consequences across the affected community. Small businesses, at least those below a certain threshold, should be exempt from this law.

Manufacturing. America was once a country driven by manufacturing, but no more. We have shifted to a service economy with lower wages and far less stability. Encouragement of the manufacturing sector would permit America to not only compete more effectively across the globe, but would also lessen the need for small businesses to import goods from other countries. Also, encouraging small manufacturers with lighter taxes and regulations wouldhelp rather than hinder their operations, the seeds for future security and financial stability will be sewn.

If the President is truly serious about bringing the nation into a post-partisan age of prosperity, the best thing he can do is take a practical, non-ideological approach to the economy and institute swift and immediate changes focused only on increasing employment, wealth creation and the growth of small business in America.

Anything else is just pork.

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