Small Business: Rhetoric and Reality

by Lindy Davies

One thing that nobody disagreed about in the 2012 campaign was that small business is good, and needs help. There was great disagreement, of course, about how best to give it that help. But nobody is against small business! It provides most of America’s jobs, and it exemplifies the very best of America’s can-do spirit, community-based Moms and Pops putting in honest days of work, et cetera.

(It could also be said that the overwhelming majority of union jobs are in large businesses, that small businesses are far more likely to provide low wages and no benefits, and to employ part-time workers and illegal aliens.) But, anyway, nobody in today’s political conversation doesn’t like small business. So, a tremendous amount of rhetoric has been thrown at this topic. But what are the facts?

To begin with, the official designation of a “small business” as a firm with fewer than 500 employees allows for a lot of wiggle room when making points on the Stump. In fact, however, 96% of US firms — 5.8 million out of 6 million firms — have less than fifty employees.

Fifty employees is an important figure, because that is the number above which employers will have to provide health insurance coverage, under the Affordable Care Act. The White House reports that “Almost all (93 percent) of larger small businesses with 50-199 employees already offer coverage.” (These figures from from the US Census.) This 50-employee threshold is the source of the hue and cry among right-wing commentators about how Obamacare makes it so much harder for small businesses to hire workers. It does, indeed, make it tough for employers to go over that number. But it imposes no penalty at all, for instance, on a business with 30 employees expanding its workforce by 50%.

Here’s how a post-election AP report sums things up:

NEW YORK (AP) — President Barack Obama’s successful re-election to a second term is sinking in. No matter who small business owners voted for, the election takes away some of the uncertainty that small business owners have been carrying around. The question now is whether Obama can satisfy those who say he hasn’t done enough to help them expand and create jobs.

During Obama’s first term, the president pointed to steps he took to help small companies, such as proposing the Small Business Jobs Act of 2010 that cut taxes for small companies and made it easier for them to obtain federally guaranteed loans. These steps have helped some small businesses start their recovery from the recession.

“We’ve been seeing steady albeit modest growth in the economy since the president took office and we are cautiously optimistic,” says John Arensmeyer, CEO of Small Business Majority, an organization that lobbies on behalf of small companies

Even so, many small business owners are critical of the president’s performance. They are anxious about taxes and the bulging federal deficit. Many opposed the health care overhaul and complain that they are being squeezed by excess regulations.

On the tax front: Obama’s tax plan would stop the Bush tax cuts for households making over $250,000 per year. According to IRS figures, 2.79% of households have an adjusted gross income of more that $200,000. (No breakdown is given for the $250K figure.) This hardly seems a drastic step, when everyone agrees that the US government bears a frighteningly high level of debt, and, absent some legislative compromise during the lame-duck session before the end of 2012, the federal government will go over the “fiscal cliff” — the deep spending cuts agreed upon as part of the debt ceiling deal of 2011 will go into effect, and the Bush tax cuts will end.

The other major small-business beef that is bandied about is the burden of government regulation. Once again, however, things on Main Street don’t always correspond to campaign rhetoric. Here are some interesting findings:

The American Sustainable Business Council, Main Street Alliance and Small Business Majority conducted the survey, Small Business Owners’ Opinions on Regulations and Job Creation.

The groups asked: What is the most important problem right now for your small business?

  • Weak customer demand: 34%
  • Cost of health coverage and other benefits: 15%
  • Level of government regulation: 14%
  • Competition from larger companies: 10%. (No other responses got more than 6%.)

Another question: What would do the most to create jobs?

  • Eliminate incentives for employers to move jobs overseas: 24%
  • Cut taxes: 14%
  • Increase consumer purchasing power: 13%
  • Improve infrastructure like roads, bridges and water systems: 12%
  • Reduce regulation: 10%

When asked whether their small business could live with some regulation if it is fair, manageable and reasonable, 93% said they could. And 78% said some regulations are important to protect small businesses from unfair competition and to level the playing field with big business.

Sounds to me like what small entrepreneurs really want most are vibrant local communities, in which people are happy to live and do business!

Now, to be sure, we WorkandWealth think-tankists have some helpful proposals to offer American small businesses. We advocate real steps, at various levels of government, to remove the onerous burdens that all productive businesses face in our economy.

We’d start with property tax reform. This is, alas, a local reform, and so can only serve the national discussion as an example — but it is a good example. Every city that has shifted its property taxes off of buildings and on to land value has seen increased building and a more vibrant market for local business. This is a win/win for local tax policy — the only way for a city to raise more local revenue in a way that actually increases development.

Sales taxes are the biggest source of most states’ revenue. Sales taxes are also regressive, and economically harmful in myriad ways.  Of course, states have large and growing revenue needs, and a perennial concern for equitable education funding. But, states that manage to avoid the trap of sales taxes (such as Delaware and New Hampshire) dramatically outperform their neighbors, while states that rely most heavily on sales taxes (such as Alabama, or New Mexico) have the most depressed economies. The solution isn’t hard to see: scrap the sales tax, and raise the revenue via a state-level land value tax. The higher land values in rich districts can be used to equalize funding in poor ones, without the small-busines-crippling sales tax.

On the national level, we could start by exchanging tax cuts for low-income Americans with an increase in the tax rate on capital gains. “Capital gains” is really a misnomer: the things that actually gain in value are land and financial assets. These “capital gains” are really transfers of wealth from producers to investors, and their benefits go overwhelmingly to the richest people. The heroic “job creators” of campaign lore are really those who produce goods and services, and hire workers — not those whose investments reap them “capital gains.”

After all, what do the small business people themselves say is their biggest problem by far? Weak customer demand! Tax reforms such as these will go a long way toward strengthening that.

 

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3 Responses to Small Business: Rhetoric and Reality

  1. When I think about small businesses, I tend to divide them into several sub-groups.

    The first sector may employ relatively few people, but not be exactly the sort of thing we think of as “small business;” I refer to hedge funds, which may not employ many people, and whose customers are not ordinary “main street” people. [Wikipedia’s entry on small business includes “The legal definition of “small” varies by country and by industry. In the United States the Small Business Administration establishes small business size standards on an industry-by-industry basis, but generally specifies a small business as having fewer than 500 employees for manufacturing businesses and less than $7 million in annual receipts for most non manufacturing businesses.”)

    Another sector of “small business” is those businesses whose busy-ness largely consists of serving as landlord to other businesses or of sitting and waiting for their community to raise the value of their unused or underused land. What their tenants pay them for consists of (a) a payment for the location; (b) a payment for the building or part of the building they use; and (c) a payment for services the landlord provides (e.g., utilities, trash pickup, etc.) Frequently, particularly in the central business district, the largest portion is for the location.

    The third sector is those businesses who either own their own business venue (but have no tenants) or rent their venue from someone else. It is this group that creates most of the jobs.

    How do we make things better for this third sector, without the benefits largely flowing to the second (or the first) sector? What sorts of policies will reduce their costs of doing business, and their rewards for their efforts? What sorts of policies will raise wages for their employees, without raising what they pay for housing and taxation combined, while still providing sufficient funding for our common spending?

    If we can do that, then those small-business employees will have more disposable income to spend, both on necessities and on luxuries — making THEM truly the job creators.

    • Lindy says:

      That’s hard to argue with, Wyn! You shrewdly point out some of the ways that the term “small business” is used to distort reality. Obviously the tax-reform ideas at the and of my post are aimed toward those small businesses that truly provide goods and services to consumers, and whose main complaint isn’t taxes or regulation, but weak customer demand!

    • Just came across a recent NYT article which includes this paragraph:

      “Because the profits of many companies are taxed as the owners’ individual income, the group facing increases also includes 3 percent of all small businesses, like Ms. Zimmerman’s. But the United States tax code is such a blunt instrument that small business may encompass anything from the neighborhood florist shop to the multibillion-dollar private equity company KKR and the Tribune Company. Data from the Internal Revenue Service indicate that 237 of the country’s 400 highest earners also qualify as small businesses, as does President Obama.” [source: http://www.nytimes.com/2012/11/20/business/economy/tax-talks-raise-bar-for-richest-americans.html%5D

      It would be interesting to know how many people those 237 employ, and how many jobs they’ve added in the past few years.

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