Tax Cuts for Small Businesses?

Watching the Sunday-morning talk shows…

In order for Obama to sell his stimulus plan he’s considering extending tax breaks to small businesses. It’s a concession to Republicans who continue to hold onto the classic Regan-era trickle-down economic theory: Reduce the taxes on small businesses and they’ll hire more people.

I don’t buy it. I’ve owned and helped manage a number of small and medium-sized businesses over the last 30 years, which gives me at least some real-world credibility in that domain. So what would I do if my company received a tax break from the federal government? In this economy, hiring new employees would be one of the last things on my list. At the top of that list would be (a) keeping the cash to strengthen my balance sheet in order to be better prepared for worse times ahead, and (b) taking the money out of the company to replace lost personal income and savings from the 40% drop in the financial markets. If my business is dropping off like everyone else’s, I certainly don’t want to increase my payroll with people who won’t have anything to do.

When times are good, all business (large and small) will expand in advance of demand. You see the potential (where that hockey puck is going to be) and you build towards it. But when the future looks bleak, you turn to survival. You cut back. You hoard cash. You wait for signs of increased demand, and only then do you invest in the growth of your business. In particular, no matter how much extra cash you may have, you never increase capacity when the volume of sales is forecast to drop.

Look at the auto industry. Detroit is in trouble, and they ask the feds for loans. But there are acres and acres of car lots with unsold inventory and the manufacturers are shutting down factories and laying off workers, trying to scale back to match the lack of demand for their products. What will the automakers do with additional cash? They certainly won’t hire more people. Why would they want to build even more cars when they can’t sell the ones they’re already making? Do we want the government to subsidize the building of cars that no one wants in the same way as we subsidize farmers to grow crops that have no buyers? (Don’t get me started on that one!)

In good times all businesses, large and small, will invest in their future opportunities. But in times like these the only thing that will causes business to expand and therefore hire, is more orders and more customers. And that, by definition, is a bottom-up process. I understand that Obama may need to include tax breaks for small businesses to appease the conservatives (as much as $200 billion, I’ve head), but I’m sorry to see it.

2 thoughts on “Tax Cuts for Small Businesses?

  1. Doug, I agree completely with your conclusion – a small business tax cut now will be a “gift” to small business owners – but not a stimulus for employment.

    As I recall the Laffer curve and Reaganomics, it was more about the (seemingly paradoxical) effect of increasing tax receipts by reducing tax rates. I don’t remember it addressing labor.



  2. I believe you’re correct, Scott, but I think the Laffer curve was just a part of what was/is generally referred to as Reagonomics. It seems to me that the term “trickle-down” has been co-opted in the past few years to refer to the more general case of reducing taxes at one level of the economy in order to stimulate activity at lower levels whereas Laffer (again, as I recall) was more about generating increased tax revenue at any level by reducing the tax burden on that level.


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