Small business job creation nonsense

Will taxing the rich help create more jobs and save the economy?

US President Barack Obama speaks on Tax Cut
Obama supports an extension of middle class tax cuts and allowing tax cuts for the rich to expire [EPA]

President Barack Obama on Monday called on Congress to extend the George W Bush-era tax cuts for all Americans up to $250,000 of annual income, but to allow them to expire at the end of the year on income above that. A tax hike on the country’s top 2 per cent, in which Obama included himself, is something most voters like. Strategically, such a proposal puts Republican Mitt Romney in the awkward position of having to either stand with the rich or stand against his party, which is uniformly against higher taxes.

Romney wants to do neither, so in response, he presented the standard rebuttal to taxing the rich: It’s bad for small businesses.

The reasoning is here that higher taxes hurt “job creators” and no one wants to do that, especially when the US economy added only 80,000 new jobs last month. Small businesses are the engines of the economy, we are told, and we accept this uncritically, because the United States is a culture that likes entrepreneurs. They are the hustlers and the wheeler-dealers, the play-makers and the risk-takers. We enjoy listening to the sales pitch. It’s part business, part entertainment.

Setting aside the dubious notion that tax cuts spur job gains, let’s ask the question: Is it true? Do small businesses drive the economy?

Size matters

As with anything to do with small business, it depends on what you mean by “small”. About 60 million people are employed by small businesses for an annual payroll of $2.1bn, according to 2006 figures compiled by the US Census and federal Small Business Administration. That’s less than half of the total number of wage earners (150 million) in 2010 after the economy grew worse. And that’s if you define “small” as having as many as 500 employees.

In fact, 90 per cent of small firms have fewer than 20 workers, employing 21.6 million people on an annual payroll of just $726m. So it’s at least debatable whether small businesses drive anything.

Even so, it would be bad policy to encumber business with a tax hike, even if they don’t employ as many people as we’d like. The question, assuming that there is a connection between tax cuts and job creation, is: Do small business owners make more than $250,000?

The numbers suggest otherwise. The federal government’s Office of Advocacy released a 2010 report on the income and wealth of small business between 1998 and 2007. Most had annual household incomes of less than $99,000 in 1998, 2001, 2004 and 2007. Only 15-19 per cent had incomes over $100,000. Around half of small businesses, furthermore, reported gross sales of under $50,000 a year.

Most businesses, it should be noted, are sole proprietors, which means only one person is getting paid. Of those that

They are the hustlers and the wheeler-dealers, the play-makers and the risk-takers. We enjoy listening to the sales pitch. It’s part business, part entertainment.

employ more than one person, 13-15 per cent between 1998 and 2007 were classified as S corporations, which means a tax up or down makes little difference since they usually don’t pay federal income taxes anyway.

Still, jobs are jobs and small businesses create the most jobs, right?

Well, that depends on what you’re talking about – gross or net.

A report by the Federal Reserve Bank of St Louis studied job growth between 1992 and 2010. It notes that gross job gains were 2.8 million per quarter. That’s very impressive. But if you take into count the number of small businesses that failed, that number is dramatically lower: just 173,000. That’s not so impressive, and suggests the breathtaking churn experienced by small business owners.


Interestingly, the Fed study also notes that the bigger the firm, the more people it’s likely to hire. This may be intuitive but it’s completely absent from debate over small business “job creators”. Just 16 per cent of jobs came from firms with less than 20 workers, the Fed study showed, but 39 per cent came from firms with 500 or more. The takeaway: Small business are just too small to put to work all the people who need employment. Those that can aren’t small.

But again this assumes that cutting taxes on those whose annual income exceeds $250,000 is a sure-fire way to create jobs. And you don’t need to be an economist or policy analyst to see that that’s bunk.

The Bush tax cuts began a decade that ended with zero net job growth, Zero. So if tax cuts created jobs, well, you get the idea.

And consider this: US corporations are sitting on about $2tn in cash. Usually, this fact is paired with the fact that the economy is flailing, and it makes the corporations look like the baddies. But what they need to make that money make more money is demand, and to create demand, you need a liberated middle class whose consumption of goods and services would truly drive the economy.

Which brings me back to Obama. To raise demand, and thus make that $2tn worth investing again, he needs to do more than extend tax cuts for those earning less than $250,000. It’s good politics, but the fact is most don’t make enough to pay federal income taxes anyway. According to Social Security Administration, half of all wage earners – or 75 million people – made less than $27,000 two years ago.

They need to take home more. And that means raising wages and redistributing wealth through higher taxes on the wealth, not just the expiration of tax cuts. And that means industrial policy that focuses on nurturing industries domestically that generate jobs that pay high enough wages to allow workers to buy what they produce.

These are all things the power elite hates, but things they might eventually reconcile themselves to, as these methods would grow the economy by raising aggregate demand. An economy can’t be sustained long by the consumption habits of a wealthy class – what Citigroup analysts called our era-defining “plutonomy“. The only way to do that is through mass consumption, which means putting more money into more hands for the greater good of the country.

More links on Plutonomy here and here.

John Stoehr’s writing has appeared in American Prospect, Reuters, the Guardian, Dissent, the New York Daily News and The Forward. He is a frequent contributor to the New Statesman and a columnist for the Mint Press News.