By Justin Velez-Hagan
National Executive Director
Washington, D.C., September 28, 2010. Yesterday, the president signed into law the Small Business Jobs and Credit Act. The bill has been touted as one of the best ideas for reinvigorating small business and job growth and, hence, deserves an analysis by The National Puerto Rican Chamber of Commerce, a staunch supporter of small business and entrepreneurship.
The legislation itself provides temporary tax incentives as well as a general account intended to provide local community banks with funding for small business lending. Although its intent is clear, language within the bill does not guarantee funding for small business lending. While 13 democrats voted against it, only 3 republicans supported the bill. One of those democrats, the Chairwoman of the House Small Business Committee and the first Puerto Rican woman elected to U.S. Congress, Nydia Velasquez (NY), voted against the bill amidst concerns that capital from the bill would not go to its intended source.
After examining the bill, it becomes clear that the tax incentives are temporary and greater strain will be placed upon small businesses, limiting their ability to stimulate the economy. Dr. Jeffrey R. Cornwall, the Director of the Center for Entrepreneurship at Belmont University, states that small business owners “don’t need more debt, they need more customers—and the government can’t provide those.”[i]
What Makes the Entrepreneur Tick?
Perhaps legislators need a lesson on how small businesses operate and the incentives that cause action within the entrepreneurial community. While only 43% of all Congressmen have any experience in private sector business and less than 25% hold an advanced degree in business administration,[ii] it may come as no surprise that they have little understanding of what drives the entrepreneur. To be fair, when considering factors that encourage entrepreneurial activity only a little common sense is necessary.
First, businesses, or at least successful ones, plan long-term. This is why temporary tax cuts never increase business activity. When planning for the long-haul, a business will not make substantial investments in personnel, infrastructure, or equipment and real estate, if in six months, one year, or even two years, its motivation for making those investments is going to be eliminated. Businesses are incentivized to make investments because they know they will pay off in the long run. Now add to that a political climate that is unpredictable, especially in the field of taxation, and who can blame businesses for hoarding cash? On the one hand you have temporary tax breaks to consider, while on the other you have an increase in taxes pending the expiration of the Bush Tax Cuts, increases in per-employee costs due to healthcare reform, drastic increases in 1099 reporting, a perceived increase in small business lawsuits,[iii] and talk of plans for cap-and-trade type taxes. One can understand why businesses, especially small businesses are nervous. And what do businesses do when they are nervous? The same thing you or anyone else would . . . they huddle into a corner and wait until it looks safe to come out again.
Second, businesses are run by people, affect people, and act like people. Elected officials need to stop painting businesses as faceless, autonomous, and impervious entities that have unlimited resources and no human connection. All businesses are run by people and people act according to the natural incentives provided them. Like any other creature in the animal kingdom, humans look for protection when times look bad—hence the stockpiling of cash by large corporations and the lack of investment by smaller firms. Every successful business looks to take on a little risk in the hopes that it will pay off in the long run and there are plenty of well-run organizations taking advantage of current markets and trends. But when the current political climate dictates anti-business growth policies, which affect people working in businesses, people running businesses, and people profiting from businesses (a long way of saying everyone), or at best, capricious policies creating unpredictable future conditions, businesses cannot be blamed for maintaining a sense of cautious skepticism like any rational person would.
Third, small businesses, much like people, take more action in environments that are simple and easy to understand. Just like fewer and fewer people train for jobs that require greater education and experience, fewer and fewer businesses invest in projects when it takes an ever-increasing amount of knowledge of markets, taxation, and regulatory policies simply to participate. And just like standard levels of education and training do not guarantee success among humans, the necessary bureaucratic minimum for business participation does not guarantee success amongst businesses. You have to excel to be successful and in order to excel you have to be more knowledgeable than the competition. With increasing regulations and more complicated tax codes, how can we expect more businesses to participate in markets, when fewer businesses are capable?
$30 billion will have zero impact on small business
Current proposals for temporary tax incentives and even the billions of dollars allocated for small business funding (which are not even guaranteed to go to small business) will have zero impact on entrepreneurship and small business growth. If every cent of the $30 billion went to the 27 million businesses in the U.S.[iv] each would receive about $1,111. Only including the 6 million businesses that currently have employees, the figure jumps to $5,000 per business. $5,000 might buy a small used car, but it is not going to be enough for any business to invest in growth, hire an employee, or substantially market its products and services. Offering 1 million businesses (only 3.7% of all businesses or 17% of businesses with employees[v]) enough to hire an average employee for one year, or approximately $30,000, would spend all of the $30 billion. But even this dearth would not give an incentive to hire since businesses plan further than one year in advance.
Even if $30 billion was granted directly to small businesses for expansion, are businesses going to expand without customers? With real consumer confidence and spending at an all time low, real capital expenditures even lower,[vi] and no guarantees for short-term improvements, investments may be futile. When legislators and regulators further try to manipulate markets creating uncertainty for future business expenses, businesses, just like the people who run them, work in them, and profit from them, will continue to refrain from additional risk and will protect their existing assets and income.
Until the current economic climate is stabilized and businesses have some sense of a steady, long-term market, they are going to shy away from investment, small businesses will not grow, and jobs will not be created.
Justin Velez-Hagan is the National Executive Director for The National Puerto Rican Chamber of Commerce. Having earned his MBA from the W.P. Carey School of Business at Arizona State University, he has started several small businesses and is currently an international developer within the assisted living industry.