Job Growth: Is Small Business Up for the Challenge?

Historically, data support the statement that all job growth comes from startups. More specifically, according to Bureau of Labor statistics from 1977 to 2005, startups (companies in existence for less than 1 year, which are almost always small businesses) add on average 3 million jobs annually while older companies lose 1 million each year. This is great information, but as Wall Street always says, “past performance is no guarantee of future results.” In this post-recession era, startups aren’t necessarily performing according to historic norms.

Where government should put its money
If startups create jobs, then it stands to reason that government should be supporting startup efforts. This would mean more funding for the SBA loan programs and SCORE et al., and new tax incentives for startups.

Unfortunately, Congress and the Administration have let small business down:

  • Congress continues to extend unemployment benefits. While this is an admirable and perhaps necessary thing to do while jobs are scarce, the funds used to pay these benefits doesn’t create jobs.
  • Funding for the SBA’s 90% loan guarantee program ran out of money and needs additional funding to continue.

It’s not clear whether tax breaks to encourage hiring are more of an illusion than a stimulus. The HIRE Act incentive (the “payroll tax holiday”) is credited with creating 4.5 million jobs, according to Treasury figures. Experts (including the Treasury’s chief economist Alan Krueger), however, question whether the jobs would have been created even if there had been not such incentive. Still, incentives such as this are needed badly to get small businesses to hire workers. Some tax and other incentives that come to mind:

  • Slashing individual income tax rates (rather than raising them, as they are scheduled to do in 2011). Most small business owners pay taxes on business profits on their personal returns.
  • End tax uncertainty. The delay in enacting the so-called extender bill has kept business tax planning in limbo. Until businesses can plan effectively, they won’t be adding to their payroll.
  • Eliminate bookkeeping chores. Business owners don’t want to devote limited hours to being the government’s bookkeeper (e.g., starting in 2011 they will have to complete 1099s for any suppliers of goods and services of $600 or more).

As Winston Churchill said: “…for a nation to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.” When will “they” get it?

After the July 4 recess, the Senate postponed action on the Small Business Jobs Act of 2010 (H.R. 5297) until after they act on the finance reform bill.

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