Public Policy, Economics and Entrepreneurship: June 2007 Archives

That is the question that is posed in the cover story at Fortune this week. The answer seems to be "yes" if you define business in terms of Big Business.

James Pethokoukis at US News also explores this question. His answer is also "yes", since Big Business loves to pick who they see as the likely winner, loves the status quo, and is absolutely head-over-heels in love with big government.

And what does the entrepreneurial part of our economy think of Hillary? Pethokoukis asked me that question. Here is what he printed from my answer to this question:

There has emerged a sharp contrast between the interests of Big Business and Small Business. In the past century, Big Business, Government, and Labor created a cozy relationship in which they found common ground to support each other. This system worked great until the 1970s-1980s, when the Big Businesses that dominated our economy for so many decades lost their economic steam. Entrepreneurs began to fill the void, creating 78 percent of all new jobs over the past 20 years. Big Business has continued to be supportive of both parties, and as a result both parties have mostly ignored the emergence of the entrepreneurial economy we now find ourselves in. They govern as if it is still 1965. However, over 50 percent of the GDP (according to the Small Business Administration) is now generated by small business in the U.S.

The Brookings Institution’s Hamilton Project (affiliated with centrist Democrats) has released a new series of reports focused on reforming America's tax system. Here is a link to their report.

What do they have in store for us if a Democrat assume power? Higher marginal tax rates for one thing. James Pethokoukis conducted an interview with Larry Summers (part of the last Clinton cabinet). Here is what Mr. Summers had to say about raising taxes:

The purpose of the tax system is to raise revenue in the best possible way, but you have to be aware of the changing economic context. At a moment like the present when inequality has increased very dramatically, it means that being smart about the tax code means making adjustments in the direction of increased progressivity. So I don't think we are asking too much of the tax code, given that we need to raise more revenue.

Sorry Mr. Summers, but you are living in a world that no longer exists -- this is the wrong time to increase top marginal tax rates. This is no longer the 1900s with our corporate economy where one worker in five worked for a Fortune 500 company. We are now in an entrepreneurial age where 50% of the workforce is employed by small business owners. And we know from studies from around the world that higher tax rates do one thing in an entrepreneurial economy -- they slow down expansion and growth.

Here is a link to a 15 minute interview with almost Presidential candidate Fred Thompson. The first part of the interview addresses his pro-growth approach to tax policy.

There are now about 20 million self employed in the US. Jimmy Atkinson has a summary of common retirement options based on the 2007 tax code for those of you who are among that growing group of entrepreneurs at his blog Ask the Advisor. Remember that self employment also means "self retirement" for the most part.

I wrote a post a couple of months ago about the problems that current immigration policy is creating for high tech businesses in their hiring. However, our immigration policy impacts more that just the hiring of high tech workers. It is also having an impact on the creation of businesses in our entrepreneurial economy.

From TechJournal South:

More than a quarter of technology and engineering firms started in the United States over the 1995-2005 decade had a least one key foreign born founder. But those who grow frustrated faced with delays in obtaining visas move back home to start companies, says Vivek Wadhwa, executive in residence, Pratt School of Engineering at Duke University....

Nationwide, these immigrant-founded companies produced $52 billion in sales and employed 450,000 workers in 2005. The majority of these immigrant entrepreneurs came from India, United Kingdom, China, Taiwan, Japan and Germany.

Immigration reform should not be code for keeping people out. Rather, we need reform so we can assure the people we need come in. This should include both unskilled workers and skilled workers.

But more importantly, we should be actively recruiting immigrants who want to come to our system of free enterprise to start their businesses. This is no less important for today's world than it was to bring in the scientists we needed in the 1950s and 1960s to help fight the cold war. It we want to remain a world power, we need to continue to have a strong economy that leads the world.

Economic growth today is almost solely the domain of entrepreneurs. Let's attract the best, the brightest, the most passionate entrepreneurs the world has to offer. However, what ever we do, we must not create a bureaucratic system that controls what industry or type of business we think that we want them to start.

Let's qualify them by making sure that they have the basic experience and skills necessary to be successful business owners, and then turn them lose. Look at their education, their experience in business and as business owners, and their legal record.

Give preference to those educated in the US. Again from the TechJournal South article:

These immigrants come to the U.S. primarily to study and many received advanced degrees in engineering, math and science fields. But the once three-year process for getting a green card that permits them to work in the United States now stretches to six or even 10 years sometimes, says Wadhwa. Rather than deal with lengthy delays, they take their advanced U.S. educations and go home to start new companies.

Let them in -- or in many cases let them stay here -- and let them compete and innovate in a free market. If not, we are feeding competing economies with the entrepreneurs who will help those countries supplant our global economic strength.

(Thanks to Jim Stefansic for passing this along).

The entrepreneurial economy in the US is still moving ahead at a positive pace, albeit somewhat modest, according to the latest survey of small business owners by the NFIB

Job openings fell and are expected to nudge unemployment up, but unfilled positions remain high. Job-creation plans, although strong, were flat. Reports of price hikes eased, but continue higher than desired. Capital-spending plans, like actual outlays, were unchanged from the previous month.

24 percent, reported unfilled job openings, down by two points from April, but historically strong. Twelve percent said the availability of qualified labor was their top business problem, unchanged since February.

Over the next three months, one-fourth plan to create new jobs, up one point, and 6 percent plan workforce reductions, up two points, yielding a seasonally adjusted net 13 percent of owners planning to create new jobs, historically strong and unchanged from April. Fifty-four percent reported hiring or trying to hire new workers, though 78 percent of those reported "few or no qualified applicants" for their positions. Job-creation plans were positive in all industry groups.

Capital spending in May was flat. Plans to make outlays in the coming months remained weak, unchanged from April's 29 percent of owners. Profit gains have not triggered a boom in spending. Reported capital outlays over the past six months held firm at 60 percent. Nearly half, 45 percent, reported spending on new equipment, 24 percent acquired vehicles, 17 percent bought fixtures and furniture, 13 percent improved or expanded their facilities. Five percent acquired new buildings or land for expansion.

An unchanged and rather weak 12 percent said now is a good time to expand facilities. A net-negative 3 percent expect conditions to improve over the next six months, up five points from April and typical of readings at later stages of an expansion. A net 16 percent expect higher real sales, up two points, and a positive sign for growth. Overall, expectations for economic growth are soft, but better.

Twenty-eight percent of those surveyed reported higher sales, and 31 percent had lower sales, producing a seasonally-adjusted net 1 percent of all firms with higher sales in the most-recent three-month period, compared to the prior three months, down three points from April.

Unadjusted, 29 percent reported raising average selling prices, up one point, and 12 percent reported lowering them, down one point. The number of firms with earnings improvements gained in May, but the number of those reporting higher worker compensation rose three points to 29 percent. Only 16 percent managed to raise average selling prices. "Labor compensation will be pressuring profit margins all year," NFIB Chief Economist William Dunkelberg said.

Of the 21 percent reporting higher earnings, nearly two-thirds, 65 percent, cited stronger sales, and 5 percent each cited lower materials costs and higher selling prices. For the 40 percent reporting lower earnings, two-fifths cited weaker sales, 8 percent blamed higher labor costs, 10 percent cited higher materials costs, and 5 percent each pointed to higher insurance costs, lower selling prices and regulatory costs.

Regular borrowing activity remained flat, reported by 38 percent of all owners. Only 3 percent said their main business problem was the cost and availability of credit. Thirty-nine percent reported all their credit needs met, compared to six percent who reported problems obtaining the financing they wanted. The remaining 55 percent did not want or need financing.

All in all, these finding show that it is a good time to cut taxes to help kick entrepreneurial activity into a higher gear.

Having been a healthcare business owner with hundreds of employees wanting healthcare coverage, I understand the frustration with our healthcare system from at least two perspectives -- as a provider and as an employer. From both perspectives I can tell you that the system we now have for healthcare payment cannot be sustained. However, most of the proposals we are hearing from the Presidential candidates will only make it worse. Just like so many questions we now face in this country, this is another case where government is not the answer.

Rudy Giuliani seems to be the only major candidate who has a solution to really address the healthcare system crisis. In the most recent debate he said:

"Health insurance should become like homeowners insurance or like car insurance: You don't cover everything in your homeowners policy. If you have a slight accident in your house, if you need to refill your oil in your car, you don't cover that with insurance. But that is covered in many of the insurance policies because they're government dominated and they're employer dominated."

I could not agree more. The mess we are in now is primarily the result of the mess that big corporations and the federal government created -- independently and through duplicitous acts throughout the latter half of the last century. Why we keep looking to either or both of them to fix the problem is beyond me. I only hope that if Giuliani is elected that this is truly a fundamental priority for him and that he can muster the will and support to fix the mess.

What is interesting is that many small businesses, out of necessity, are developing a system as Giuliani advocates ad hoc. They are sending their employees out to get individual insurance and helping to financial support that coverage through higher pay that they can offer through the savings of not providing group coverage. In many cases this takes it entirely out of the tax system, which is key to making this change in approach to healthcare payment work. There should be no tax deduction for health insurance -- period. Not corporate and not individual.

We have the best healthcare in the world. Let's not ruin it by making our method of paying for it a socialized approach. I am sure that most of my readers in other countries would testify that government systems are not effective.

For more excellent thinking on this topic see James Pethokoukis's essay writing for US News and Arnold Kling's essay at Cato's website.

The government wants to get its fingers into the new economy in a bad way -- it is what I call socialized entrepreneurship. And, if some of the Presidential candidates get their way we could see this trend taken to a whole new level. James Pethokoukis at US News has a good summary of Sen. Clinton's ideas on how the government can "help" innovation. All of her ideas involve more government programs and agencies that try to pick the winners and losers.

I guarantee you that any approach like the one outlined by Clinton will become a political circus, with special interests stepping up to get their pork. Entrepreneurship works best in a free market. Let's keep Washington's backroom deal making and politicking out of our entrepreneurial economy.

Well, the tax code just got longer, but this time the added pages (now about 65,000 and counting) should help out some small businesses, at least in the short-run.

The Small Business and Work Opportunity Tax Act of 2007 was recently passed in conjunction with legislation to continue funding the war in Iraq and to raise the minimum wage. The tax-related provisions are designed in part to provide benefits to small businesses likely to be hit hard by the minimum wage increase.

Here is a summary of the provisions that have an impact on small business as published by the accounting firm KraftCPAs (used with permission):

The Section 179 election to expense property in its initial year (rather than depreciate it) is extended through 2010 and increased from $100,000 to $125,000, effective for years beginning after 2006. The expense deduction begins to phase out if more than $500,000 of eligible property is placed in service during the year (up from $400,000). These amounts will be adjusted for inflation annually.

The Work Opportunity tax credit, which had been set to expire Dec. 31, 2007, is extended until September 30, 2011. This credit is available to businesses that hire employees from targeted groups of individuals, such as veterans, ex-felons, high-risk youth, and food stamp and supplemental security income recipients. The new law expands this list to include disabled veterans and individuals in counties that have suffered significant population losses. If you hire a target employee, your business can receive a 40% tax credit for the first $6,000 paid to that worker.

The individual and corporate alternative minimum tax (AMT) limits on the use of certain credits are waived, effective for years after 2006 as well as for carryback of these credits. This applies to the Work Opportunity credit and the credit for taxes paid on employee tips. Employers are also now eligible for the full tip credit despite the increase in the minimum wage.

[The act] includes certain S corporation and pension provisions, but they are generally too obscure and technical to cover in this [summary]. Contact your tax advisor to ascertain whether any of these changes affect your tax planning strategies.

Check with your own tax advisor to determine what, if any, impact these new provisions have on your business.

The entrepreneurial economy just keeps on chugging along. We just had our 45th straight month of real job growth.

Rising property taxes can often squeeze homeowners out of neighborhoods that they have lived in for years. And they can also force small business owners to sell their businesses. Such is the case of a 117 year old family owned amusement park outside of Washington, DC. From the Washington Post via Cato-at-Liberty:

For 117 summers, generations of children have frolicked through Trimper's Rides on this beach resort town's signature boardwalk. But this Memorial Day weekend might begin the last summer they circle the antique wooden carousel, fling around the Tilt-a-Whirl and loop through the Tidal Wave roller coaster.

The Trimpers say they are considering closing the amusement park and arcade this year.

As Ocean City has exploded into a megaresort, property taxes have soared for Trimper's, which operates on the last chunk of undeveloped land on the town's three-mile boardwalk. In the past three years, family members said, their assessed property value has tripled, from $21 million to $65 million.

So the family is now torn over the possibility of having to sell the business because they just can't generate enough revenue to pay for the property taxes. I know, I know. Don't cry for them -- after all they now own land that is worth $65 million. But, if you read the rest of the story, you will hear a message that I hear over and over -- it just isn't all about the money. This is a century old family business. They take joy and pride in providing good family entertainment and good jobs.

Yet another example of public policy that is blind to our entrepreneurial economy.

(Thanks to Bill Hobbs for passing this along).