Facts Do Matter When Making Policy

Sometimes, a myth is repeated so often that it becomes a universally held “truth”.

Such is the case regarding the widely held beliefs about small business and their relative importance in the economy.

Elections hinge on and decisions rely upon our perception of what small businesses mean to the American economy. Part of the problem rests on the definition of “small”, but a generally accepted level is 20 employees or less.

President Obama says, “Small business is the backbone of our economy”
Other well-meaning, but equally false statements are:

“Most American jobs come from small business”
“Small businesses drive the economy”
“Most job growth comes from small business”

On and on.

And wrong, wrong , wrong.

So, what are the facts?

A recent article in Bloomberg illuminates the true situation. Charles Kenny wrote an excellent piece explaining the results of a University of Chicago study on American business.

Check out these facts:

1) In 2007 (most recent year of comprehensive data), there were about 6 million businesses in the U.S.

2) Of those 6 million businesses, about 90% would qualify as “small business”-20 employees or less.

3) Here’s where it gets interesting: those 90% of all businesses account for about 20% of all jobs. Yes, only 20%.

4) Said another way, 80% of all American jobs do NOT come from small business.


5) Between 2004 and 2008, only 3% of these small businesses added more than 10 employees. So, while companies like Apple and Hewlett-Packard start out as “small businesses”, only a VERY small percentage actually grow to be substantially bigger businesses.

This makes some sense, as many small business owners have no desire to grow big. They started their businesses in order to be their own boss or earn more than they could as the employee of a firm owned by someone else.

Of course, this has enormous implications on tax policy—and the politics that drive it. Republicans have fiercely protected the tax breaks of those making over $200,000 a year or more largely on the argument that these people are small business owners who are creating jobs.

False.

Fewer than one third of those self-identified small business owners even belong in the top two tax brackets.

In order to solve our unemployment issue, we need to encourage medium to large businesses to hire. Most of these behemoths are either privately held by extremely wealthy individuals and families or are publicly held companies.

The facts have borne out that the larger companies generally pay higher wages, have better benefits and attract workers of a higher education level.

Manufacturing is the true backbone of our economy—and so many of those jobs have drifted overseas that we have left ourselves in a vulnerable position. To bring jobs back, we need to do one or both of the following:

A) Impose tariffs on imported goods, thereby eliminating the competitive advantage of lower cost-to-produce that caused the exportation of jobs in the first place…or

B) Lower corporate tax rates for goods manufactured in the U.S. and/or raise them for good produced in other countries by U.S. firms and then imported.

Personally, I like option B better.

Eliminate the incentive to export labor and voila! The jobs return. While doing this, eliminate the Bush tax cuts on the wealthy and bring the ultra-wealthy in line with the vast majority of Americans who are paying a higher percentage of their income in taxes.

It’s not “class warfare” to correct an injustice. The reality is that the gulf between the wealthy and the middle class has widened because of tax policies that favored the rich---class warfare, institutionalized as an inequitable tax structure has created the conflict. Correcting the imbalance has been attacked as if it were the cause, not the effect.

Restore a balanced tax code (or better yet, start from scratch) and do the two things above to super-charge the economy. It’s really that simple. We don’t have to scrap our environmental laws to attract big businesses to expand. We just need to make it more profitable to keep jobs in the U.S. than to ship them overseas.

Americans like Herman Cain’s “9-9-9” tax proposal because it is two things to them:

1) Fair and
2) Simple

Maybe it is a bad idea-maybe it won’t work, but it is straightforward and easy to understand. Washington politicians don’t like simple solutions because they are transparent—and their violation is noticed. No, the lawmakers (most of whom are lawyers themselves) favor complex formulas and a myriad of exemptions because tax hikes can be embedded more easily.

The terrific Bloomberg article can be read online at:

http://www.businessweek.com/magazine/rethinking-the-boosterism-about-small-business-09282011.html

Send it to your favorite politician. He or she needs to operate from facts, not fantasy.

If you’d like my blog in your box, just let me know: tim.moore@cumulus.com