Dr Jeff Cornwall

High Tax Rates Stifle Entrepreneurship

New research released today by the NFIB suggests that allowing tax relief on the top individual rates to expire will hurt job creation and the economy.

The report, published by Ernst & Young and authored by Dr. Robert Carroll and Gerald Prante, estimated the effects of the policy advocated by President Obama and some Members of Congress to allow the top tax rates paid by small-business owners to rise sharply starting January 1, 2013. It finds that over time the economy would be 1.3 percent smaller and there would be 710,000 fewer jobs. More than 72 percent of S corporation income is earned by the half-million S corporation owners who pay the top two rates.

Increasing individual rates directly impacts small businesses organized as S corporations, partnerships, LLCs and sole proprietors, also known as “pass-through” businesses. NFIB research shows around 75 percent of all small businesses are organized in such a manner.

Together with the new 3.8 percent tax on investment income introduced in the health care reform law, the study finds that the top tax rate on pass-through business income would skyrocket from 35 to nearly 45 percent.

Other studies suggest that such a 10% marginal tax rate increase will decrease start-up activity by 15-20%.

 

 

Who Owes Who for America’s Success?

In case you missed it over the weekend, President Obama said the following about entrepreneurs: “If you’ve got a business — you didn’t build that. Somebody else made that happen.”

Now I am the first to say that entrepreneurs do not build a business alone. They need help from employees, customers, investors, suppliers, family members, and the broader community.

That being said, entrepreneurs are the ones who take the risk to launch the business. They are the ones who do not get paid if money is tight. They are the ones who personally guarantee the business’s loans.

NFIB President and CEO Dan Danner nailed it today when he said, “His unfortunate remarks over the weekend show an utter lack of understanding and appreciation for the people who take a huge personal risk and work endless hours to start a business and create jobs. “I’m sure every small-business owner who took a second mortgage on their home, maxed out their credit cards or borrowed money from their own retirement savings to start their business disagrees strongly with President Obama’s claim.”

Entrepreneurs do not owe any of their success to what politicians do in Washington.  They do not owe their good fortune to government.

It is the government that owes its successes to the entrepreneurs who built our once mighty economy through the pursuit of free enterprise.

Amy Payne at the Foundry put it this way: “The slap in the face to hard-working Americans conveyed Obama’s belief that it takes a village—a heavily subsidized village—to create that venture you’re profiting from.”

Why the Mood of Entrepreneurs Matters

The word out today on the mood of entrepreneurs in the U.S. and it is not at all encouraging.  The NFIB Small Business Optimism Index is down sharply this month.

And who can blame them!

Unemployment remains high and shows to positive growth.  Don’t be fooled by the “80,000 new jobs” spin.  Due to our population growth in this country we need at least 130,000 new jobs each month just to break even with the added people coming into the workforce.  Without jobs, people are not spending.  And without spending in our economy, there is no reason for entrepreneurs to become aggressive again and get into a growth mode.

The President is drawing a line in the sand insisting on increasing taxes for those earning over $250,000 a year.  Many who fall into this proposed tax increase are entrepreneurs.  We know that for every 1% increase in the marginal tax rate that we can expect a 1.5 to 2.0% decrease in start-up activity.  Remember that this announcement came after the survey from the NFIB that showed a sour mood among business owners.

And then there is the new healthcare model about to roll forward in this country.  Many small business owners are paralyzed by the implications of this law.  I have had a couple of friends estimate the costs for their small businesses and it is tens of thousands of dollars for even a modest sized payroll.  Obamacare will lead to a huge decrease in employment in small business as it is implemented over the next two years.  (By the way, most of what we are hearing from the Republicans is only lip service, so we should all plan for it to move ahead).

So we can see why small business owners are in a foul mood.  A weak consumer base, increasing taxes, and increasing labor costs are not going to spur entrepreneurs to help lead the economic recovery.

So why should we care?

Entrepreneurs have led every past recovery.  If they are not optimistic they are not going to hire more workers, buy more inventory and increase capital spending.

This economy is dead in the water and we are doing everything wrong when it comes to helping those who can help rebuild economic growth

A Tough Road During Tough Times

Several new studies of small business owners today show that tough times continue for entrepreneurs.

Two surveys released today offer some disturbing results.  Wave Accounting, a cloud based accounting software company for micro and SMB’s, released a survey of their 250,000 micro and SMB customers and Pepperdine University’s Graziadio School of Business and Management joined with Dun & Bradstreet Credibility in a survey released today of 6,000 small business owners.

The Wave survey reinforced what a lot of us suspected.  The number of accidental entrepreneurs, those who started businesses after finding themselves unemployed and unable to find work, has doubled over the rate found before the recession began (from 9% to 18%).

And the role that government incentives played in their decision to launch their business?  Only 2% of respondents in the Wave survey said government incentives fed the decision to go into business for themselves.  And in the Pepperdine survey, only 1% said the highly publicized crowdfunding JOBS Act would have any impact on their ability to raise needed funding.  So don’t let politicians fool you into believing that their attempts to steer and guide the economy have an impact!

And speaking of financing, only 41% of the businesses looking to raise capital were successful.

A shocking figure from the Wave survey relates to how well the business owners were able to meet their basic needs through their business. An incredible 52% of American small business owners can’t put food on the table through the earnings from their business over the past twelve months.

Even though many said they can’t make ends, it is not due to a lack of effort.  Two thirds (66%) of business owners in the Wave survey reported struggling with time management and work/life balance with 43% of respondents having to work after normal business hours to take care of administrative tasks like accounting and bookkeeping.

All of these results shed light on why business owners remain gloomy about the outlooks of the economy.  Last week the NFIB small business optimism survey continued to show weak results.

“In the last year, small-business optimism has limped along, and today the sector is no better off than it was just over a year ago,” said NFIB Chief Economist William Dunkelberg. “The lack of progress is discouraging, producing no signs that economic activity will pick up this year at all. The calculus of spending decisions requires an estimate of future sales, tax rates, interest rates and credit availability, labor costs, health-care costs, regulatory compliance costs, all of which are very uncertain. Most of this uncertainty is the result of what is happening—and not happening—in Washington.”

A survey released earlier this month by Citibank suggests that entrepreneurs are not giving up in spite of all of the challenges they now face.  53% of respondents of this survey say they have reinvented their business models “to stay afloat or competitive.” This strategy is reinforced in the current competitive climate that 38% of respondents describe as “extremely intense.”

As I have pointed out in the past, we need to keep in mind that all of these results come from surveys of business owners who have survived the recession.  Imagine what all of those who are casualties of the Great Recession might tell us!

Platform Suggestions

Those meeting in Tampa Bay and Charlotte for the two major national political conventions  will be giving lots of lip service to entrepreneurs and small businesses.  If they want to add some substance to their platforms, they need to remember that the burden of taxes an regulation are two of the biggest challenges facing business owners that government can change.  That is what our attention should be on if we want entrepreneurs to try to help pull this economy out of this prolonged downturn.  What kind of burden are small businesses facing?  Take a look at this graphic:

Chamber of CommerceInfographic designed by Chamber of Commerce

A View from the Front Lines

My good friend Ami Kassar wrote his first blog post for the New York Times today.  In his post he offers a rather stark assessment of the current state of the small business economy:

We have been reading reports that the recession is over and that the economy is on the mend. I can assure you that for most small-business owners that we talk to at MultiFunding, this is far from the case. Many are still reeling from the recession and struggling to catch up. Working capital is a fight. Banks are not easy to deal with, and fair loans are tough to come by. If you own a retail or service business, it is even harder.

This is the same thing I am seeing among our alumni entrepreneurs and the many other small business owners with whom I cross paths.  This recession is far from over and I see very little hope for a recovery any time soon.

Both candidates for President give lip service to entrepreneurs, but neither have a very good track record.  One distrusts free markets and views bigger government, more regulation, and higher taxes as the solution for whatever ails us.  The other has a history of using bigger government and cozying up to big corporations for his favorite bag of tricks.

Thank goodness for the resiliency of entrepreneurs in this country!  They are going to need it!

May Updates on Small Business Economy

While April showers have brought wonderful May flowers in our backyard, entrepreneurial economy is not blossoming going into the summer.

Here are some highlights from various indicators:

  • 71 percent of small business owners still believe the United States economy is in a recession according to results of the 2012 U.S. Bank Small Business Annual Survey
  • The SurePayroll Scorecard data shows that month-over-month, hiring and paycheck size show little change, both down 0.1%, while year-over-year, hiring is down 1.5% and paychecks are down 1.1%. Optimism among small business owners is also down from last month.
  • Intuit’s Small Business Revenue Index shows that revenues have been growing slowly, while their Small Business Employment Index shows that employment is growing slowly, by 0.2 percent in May.
  • Data from nominees to Ernst & Young’s Entrepreneur of the Year program, shows that over the last two years employment growth in this select group of high-growth companies was 31% job growth. While this sounds promising, these businesses are hard-wired for growth, so in many ways these figures are not as robust as I would hope to see.
  • William C. Dunkelberg at NFIB said this today about their latest small business survey, “May was a stagnant month for employment in the small-business sector, with the net change in employment per firm, seasonally adjusted coming in at ’0′.”

Small Businesses Still not Hiring

It is getting to be a broken record — we need small businesses to lead us into a real recovery that is based on job growth, but small businesses are just not ready to increase their workforces.

Two job indexes released this week show mixed results.

SurePayroll Scorecard data shows that month-over-month, hiring is down -0.1% and average paychecks are down 0.3%.  Looking at this year compared to 2011 at the same time, hiring is down 1.3% and paychecks are down 1.3%.

The same survey showed a drop in optimism among small business owners to 65%, down from last month’s 70% finding.

Like the recent NFIB surveys, those small businesses looking to hire are finding it a challenge, particularly when it comes to finding qualified technology, sales/marketing, customer service, administrative workers.

The Intuit Small Business Employment Index shows that small business employment increased slightly — 0.2 in April.

Taken together it paints a familiar picture — no recovery led by small businesses is visible at this time.

All Signs Show Continued Weakness in Job Creation

It looks like a continuation of a weak economy is likely for at least the rest of 2012.  We know from previous surveys that weak demand is what is holding businesses back from hiring.  It appears that a turnaround is not in our immediate future.

There were some signs of hope in March’s employment numbers.  Intuit Small Business Employment Index showed modest growth in jobs.  And the latest survey from the NFIB also showed some improvement in March.  One exception to these surveys was SurePayroll’s Small Business Scorecard, which showed no job growth in March.

While there has been evidence of modest improvement in job creation over the past few months, the outlook is not good for any continuation of job growth in the economy.  It appears that any improvement may have been short-lived and not sustainable.

“March came in like a lion, with Main Street seeing significant job growth in March—but it appears to have gone out like a lamb, and with no cheer in the forward-looking labor market indicators. What could have been a trend in job growth is more likely a blip,” said NFIB Chief Economist Bill Dunkelberg. “And what looked like the start of a recovery in profits fizzled out. The mood of owners is subdued—they just can’t seem to shake off the uncertainties out there, and confidence that the management team in Washington can deal with the effectively is flagging. What we saw in March is painfully familiar – this was the same pattern of growth followed by months of decline from 2011. History appears to be repeating itself—and not in a good way.”

An additional concern in the NFIB survey is that those small business owners who do want to hire, are having difficulty in finding qualified workers.  Among the entrepreneurs we work with, the specific shortage is in technology workers.

So what do we hear from policy makers in Washington?  They continue to treat the current situation as if it is simply a shortage of capital.  The latest attempt to pump money into the system comes from the “Jobs Act.”  This legislation is an attempt to open up capital markets to support entrepreneurial ventures to a broader group of investors.  (NOTE:  The devil is in the details regarding any impact on this new law as the SEC has yet to write the rules.  Stay tuned, as the actually implementation of this bill will likely be very different than advertised by the politicians who passed it).

But even if the Jobs Act was implement as promised, it does not solve the real problem in our economy.  As Ami Kassar rightly points out, this bill plays into the myth of what kind of entrepreneurial activity really grows an economy.  This is a bill that plays well in Silicon Valley, but probably will have little or no impact on Main Street.  Kassar argues:

In my opinion, the last thing these main street entrepreneurs need is crowdfunding (passed in the Jobs Act today). The first thing an entrepreneur should do is try to figure out how to execute their business model without selling off shares to investors. After all, the investors never go away in their company.

We should be encouraging our entrepreneurs to bootstrap their ventures. We should be doing everything in our power to open up lines of credit and loans at reasonable prices to small business owners. We should be doubling down on efforts like SCORE and / or the SBDC’s to provide mentorship.

And we need to leave more money in the pockets of the consumers who do have jobs and in the bank accounts of the small business owners struggling to sustain their businesses through this prolonged recession.  Government is never an efficient nor an effective middle man for economic growth.  Let’s keep more of the money people are earning in their wallets so they can begin to spend more of it on Main Street.

The Debate On Tax Credits For Angel Investment

Tax credits for angel investment are now part of the economic strategy of almost half the states. And many more are actively considering this tax strategy. I have never been much of a fan of this strategy. My concerns are certainly grounded in my philosophy that markets work best when left mostly to themselves. Entrepreneurs and their customers are much better at figuring out promising new businesses and industries than politicians and bureaucrats.

But there is also a more pragmatic reason that I oppose angel investment tax credits – they just do not deliver what is promised in terms of economic growth and job creation.

I was asked to argue my side of the case on angel investment tax credits in an article I wrote for the Wall Street Journal this week. You can see the debate here.