More on Small Businesses and the Administration

by Veronique de Rugy

Thanks to Kevin Hassett and Alan Viard for setting the record straight about the impact that letting the Bush tax cuts expire could have on small businesses.

The numbers are clear. According to IRS data, fully 48% of the net income of sole proprietorships, partnerships, and S corporations reported on tax returns went to households with incomes above $200,000 in 2007. That’s the number to look at, not the 3%. Would Mrs. Pelosi and Mr. Biden deny that the more successful firms owned by individuals in the top income-tax bracket are disproportionately responsible for investment and job creation?

Now, I guess to try to appear more business-friendly, the administration is weighing “hundred of billions in small business tax cuts,” according to the Washington Post:

The White House is seriously weighing a package of business tax breaks — potentially worth hundreds of billions of dollars — to spur hiring and combat Republican charges that Democratic tax policies hurt small businesses.

The Post adds that

among the options under consideration are a temporary payroll-tax holiday and a permanent extension of the now-expired research-and-development tax credit.

It’s really fascinating that in the face of all its previous failures, the administration continues in the same direction. It has tried the tax-credit route before, it has tried spending disguised as a tax cut, it has called on the useless Small Business Administration to guarantee more loans to small businesses and drop borrower’s fees. It hasn’t worked, because it never works.

Take Obama’s recent request that enterprises of any size receive a $5,000 tax credit for each employee they add to their payroll this year as part of a new $26 billion job bill going through Congress. Start-ups launched in 2010 would be eligible for half of the tax credit. This is a bigger version of the $1,000 tax credit passed by Congress in February or the ones included in the $17 billion May bill.

He rightly assumes that lowering the cost of employment helps firms keep their current employees or hire new ones. He wrongly assumes, however, that tax credits are a good way to reduce these costs. I asked a small business owner during a recent radio show to explain to me why the tax credit wouldn’t work, and he confirmed my intuition. This tax credit is useful only if you have a tax liability, which you likely don’t have when business is slow.

Formal statistical work by economists such as Joel Slemrod has shown that rebates and tax credits generally produce no statistically significant increase in consumption. And if you remember, in an interview, William Dunkelberg, chief economist for the National Federation of Independent Business, said, “Our member surveys for plans to add inventory and plans to hire are all coming in at 35 year lows. They have no reason to hire anybody because they don’t have anything to do. That’s why the tax credit is a silly idea.”

If the administration were so eager to help businesses, large or small,  it would end the constant public-policy uncertainties that businesses are facing: The health-care overhaul, which will bring new but still unknown obligations to insure employees, and legislation aimed at tackling climate change, which could raise businesses’ energy costs, add to the uncertainty about the economy. The new financial regulation, which will take years to put in place, adds its share of uncertainty, as does the potential expiration of the tax cuts. Meanwhile, as government spending increases, so do the chances of more taxes in the future.

In July 2010, Richard Fisher, president and CEO of the Federal Reserve Bank of Dallas, explained that “businesses and consumers are being confronted with so many potential changes in the taxes and regulations that govern their behavior that they are uncertain about how to proceed downfield. Awaiting clearer signals from the referees that are the nation’s fiscal authorities and regulators, they have gone into a defensive crouch.”

Neither small nor large businesses can flourish in a world of uncertainty. It’s not that hard to understand, is it?