The Government Actually Can Help Small Businesses


Saying that our government can actually help small business sounds like the punch line to a pathetically weak joke, but it actually is possible.

It is generally accepted that the true growth engine for job creation is powered by a healthy and vibrant small business community.  It is also generally accepted that government regulation and onerous taxation adversely impact small business disproportionately.

Unnecessary Regulation

If an individual starts any business, capital is required.  Let’s assume that a budding entrepreneur saves his or her pennies, borrows money from family or friends, or even has the courage to take out a loan with their own home as collateral, to start their dream, which is working for themselves, and ultimately becoming the next Bill Gates or Steve Jobs of the widget industry.

Now that they have ready access to a modest amount of capital, what is the very first thing that they must spend part of that capital for?  A location to operate from, with the rent that will involve?  Machinery and equipment to produce their widgets?  Raw materials?  Hiring people to help them?  The correct answer, in most cases, is “None of the above.”  In the vast majority of jurisdictions in this country, the first thing an aspiring entrepreneur must acquire is a business license.  He or she needs to get permission from the government to even attempt to start making a profit from their own initiative, hard work and creativity.  Think about that for a second.  You have to have the government’s permission to try to make a living.  You don’t need the government’s permission to get a job and work for someone else.  You don’t need the government’s permission to do many things.  But you need the government’s permission to even attempt to start a business.  Let’s eliminate that nonsense for openers.  It does nothing to protect the public in any way.  Bernie Madoff most likely had a business license, and we know how well protected the public was from that exercise.  A quick look at the Angie’s List website would probably offer more assurance than the issuance of a municipal business permit.

Depending on the requirements of the various state legislatures, the aspiring entrepreneur may also need a license requiring a demonstration of a minimum level of expertise in their chosen field.  Plumbers, electricians, contractors and others are commonly thought of in this regard, but so are hair dressers, barbers, manicurists, and a raft of others, including undertakers.

Now I will be the first to endorse the idea that maybe anyone who wants to hang out a shingle as a doctor should have some demonstrable expertise and education in medicine.  I also find the idea that an electrician or plumber should be able to prove that it is unlikely that they will destroy the house that they’re working on.  But undertakers and hair dressers?  How much damage can they do to their customers?

Sadly many of these license requirements are demanded by governments in response to intense lobbying on the part of existing practitioners, as a way to limit competition.  And limiting competition not only reduces the opportunities for ambitious, young entrepreneurs to start their careers, but the lack of competition also increases costs for the consumer.

Competition in mature industries usually starts with price competition.  New entries usually compete with established firms on the basis of lower prices being offered to the public, a practice which generally benefits the consumer.  The profit motive itself will encourage innovation in developing new ways to reduce the cost of providing those goods or services so that companies can still make a profit even at lower unit prices. Protecting the “old guard” in an industry by legislative fiat only insures that the consumer pays more while receiving less than they could otherwise.

It also insures that there will be less job growth when new small businesses are still-born.  In this case “less job growth” equals “zero new jobs.”

So how about having our legislatures review the real need for licensing for every profession that currently requires one?  Even if only a quarter of the professions that currently require a license had that burden lifted, there could be a lot of new jobs created.  Once again, look at the impact of Angie’s List, or of a competing website, and ask which is more cost effective in terms of advising the public of the danger of less than stellar performance from a business.

Other regulations vary from industry to industry, but in general, within any industry, regulations usually follow a “one-size-fits-all” pattern.  OSHA regulations generally don’t differentiate between Mom-And-Pop Manufacturing Co. and General Motors.  But are the exposure of employees to every possible danger the same in both companies?  Could there actually be differences in the levels of exposure to injury to employees between General Motors and a small cabinet maker who only sells in a limited area with just a couple of employees?  Well, perhaps regulations could be drafted taking those differences into account.  Or even lifting some regulations entirely for very small businesses.

To provide an incentive for states and localities to minimize useless regulations, let’s have the Small Business Administration float the idea that any states that continue to have counterproductive nonsense such as demanding permits to start any business, or requiring hairdressers or manicurists to have a “professional license” be denied any and all SBA loan guarantees within their state.  You want to make life harder Governor, for people who are (a) trying to make a living, (b) desirous of hiring people for private sector jobs and reducing your welfare and unemployment rolls and (c) potentially offering attractive benefits (such as health insurance) to these new hires, the Federal Government will be glad to help you make it as difficult as possible.  And the Feds will be more than happy to tell the residents (that’s voters to you idiot politicians) that you, Governor, and your equally myopic legislature, are the reasons no one will be hired who might now be unemployed.

Some readers will ask “How about repealing Obamacare to help small businesses?”  You should remember that it’s rare for a start-up to hire more than fifty people, and (at least as I understand this convoluted and counterproductive law) having fewer than fifty employees lifts the burden of Mr. Obama’s disaster from your shoulders.  Wasting political capital to help people that don’t currently need help is not going to be helpful.

Any attempt to create some sort of “comprehensive” law to reduce all the damaging regulations that are retarding attempts to improve economic growth are bound to fail.  Progressives will wail, gnash their teeth and beat their breasts while saying that every single existing regulation is the last bastion of protection between the American people and abject slavery.  They are very good at it, and have been successful for nearly a century in conning the voting public into believing it.  But it’s a lot more difficult to cry “They’re gonna put you back in chains” when you take each regulation individually.  Even Nancy Pelosi is going to be hard pressed to claim that she’s protecting us from unimaginable horror when the question is whether or not professional licenses are needed for dog groomers.

For 100 years, Progressives have undermined America’s economic engine by small increments.  Conservatives have to recognize that they must reverse this situation in small steps.  A small step can attract public support, and has a chance to succeed.  Comprehensive restructuring only allows Progressives the chance to obfuscate, distract, as well as portray false narratives that undermine public support and ultimately doom such an effort to failure.

Taxation

How should the government, at all levels, deal with taxing these new businesses?  The vast majority of new start-ups file their taxes as sole-proprietorships.  All that means is that any income generated by a start-up is taxed just as if it were reported by some employer via a W-2 at year end for each of their employees.  The only difference, essentially, is that each new entrepreneur is taxed at the same rate on their business income (when there is any) as their other income, but have to identify “Business Income” separately.  And of course, they get to pay twice the amount for Social Security taxes as any regular employee.

As stated before, it is generally accepted, from statistical evidence that the majority of new start-ups fail within the first five years.  There are many causal factors in those failures, but lack of capital and poor cash flow are common issues.  Since our budding captain of industry has to report business income separately anyway, suppose we just absolve them of any tax liability for the first three years of their existence, and then treat subsequent income to a sliding scale of tax rate based on time since the inception of the business.  After all, if they need every nickel that they can get their hands on to stay afloat, why stack the odds against them?  How much revenue could the government generate from a start-up versus the cost of providing unemployment compensation to that entity’s employees should it fail?

Of course, that very same logic should be applied to every legislative mandate that is applied to business, beyond income taxes.  How much better off would an increase in the minimum wage make some workers, when others would have their incomes drop to zero when the struggling entrepreneur realizes that they cannot afford to keep their six employees.  When the “minimum wage paladins” of Congress decree a $2.50 per hour increase in base wages, that results in an actual cost of doing business of more like $3.00 per hour when fringe costs such as the employer contribution to Social Security, unemployment, worker compensation insurance and so on are added in. In this example, the young entrepreneur would find that their six employees would cost them an additional $37,000 per year for exactly zero benefit to the organization.  It might get a few more of the employees to vote Democrat, but as for the new company?  Zip. Nada. Zero.

(On a side note, if employees are granted more income without any newly acquired skill that might help the new start-up, how much incentive is there for employees to acquire any new skills at all?)

That would mean that he or she would have to lay off one or two of their six employees just to stay solvent.  That helps everyone, doesn’t it?  One or two individuals lose their jobs, while their colleagues get a little bit more take home pay.  Of course with one or two less workers production would inevitably lead to decreased total output, which would then lead to longer delivery times.  Delays in deliveries would more than likely cause a reduction in future orders, which would then become a downward spiral until all the employees are laid off and the business shuts its doors for the last time.

It goes without saying that this is a simplified view of the problem.  But it may prove useful when one has to explain to any Progressives that the reader might encounter why conservatives are resistant to “improvements” that will result in greater job losses.

In essence we have to be able to explain to the dunces in the (political) class why every time the government tries to “help” us by over-regulating or over-taxing business, especially small businesses, they automatically invoke the only reliably enforced law to ever come out of Washington, a state capital, or even a city council – the Law of Unintended Consequences.

 

Cross-posted at Canada Free Press

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About Jim Yardley

Retired after 30 years as a financial controller for a variety of manufacturing firms, a two-tour Vietnam veteran, and independent voter.
Gallery | This entry was posted in Business, Democrats, Economy, Government Spending, Jobs, Limited Government, Obamacare, Observing Our Culture, Political Doubletalk, Politics, Taxes and tagged , , , , , , , , , . Bookmark the permalink.

One Response to The Government Actually Can Help Small Businesses

  1. Pete Morin says:

    Excellent article, Jim. It all makes perfect sense. When the Nation had a free market, capitalist economy the regulatory, and tax burdens were reasonable and allowed the entrepreneur the ability to create goods and services that consumers, that would be you, the voters, could put to the best possible use.

    Alas, we no longer live in a free market, capitalist economy. After one hundred years of Progressive regulatory and tax policy from local, state and Federal agencies, we’re left with the monstrosity of a welfare, socialist state. Turning back from this emotion driven, propaganda filled leviathan sized nightmare may well be impossible. There are too many free goodies being dispensed to the low information voters to pierce the dead brain matter of a subjected populous.

    I say again your account of regulation and taxation’s burden upon the engine of our past economic growth is spot on. Can we overcome the apparent good life produced by the welfare state? Let me put forward that famous song title by the bearded ones—“the future so bright I gotta wear shades.”

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