“I don’t go tanning anymore, because Obama put a 10 percent tax on tanning.” Snooki, New York Post, Sunday, August 1st, 2010.
It’s a sad day when Snooki, breakout buffoonette of the MTV hit reality show Jersey Shore, knows more about economics than the White House policy staff. You tax an activity; you get less of it. That shouldn’t be too hard a concept to grasp, unless you work in the Obama Administration.
Saturday morning headlines greeted the best and brightest of the West Wing and the Executive Office Building next door (where most of the complex’s economic staff is housed) with the decidedly non-MTV reality of an economy that badly needs more jobs and growth: “Recovery Loses Momentum” (Wall Street Journal); “Growth too slow to drive up hiring” (Washington Post); “Recovery Slows: Outlook on Jobs Grows Dimmer (New York Times). All were reporting on the Commerce Department’s release the day before of disappointing second quarter GDP data.
How did the Administration respond? It doubled down on its announced determination to increase taxes on the historic sources of net new jobs and growth in the American economy – entrepreneurship and small business.
That’s not how President Obama’s economic team put it, of course. “Tax the rich,” was their mantra, as it has been the mantra of the left wing of the Democratic Party for the last three decades.
The party’s left wing – now reigning in the White House – has long dismissed the idea that most new investment, including investment in small and growing businesses, comes from people who have the means to invest. Instead the administration trumpets its flood of targeted tax breaks and SBA administered loan programs as a substitute for the broadly based rate reductions in the soon-to-sunset 2003 Bush tax legislation. After all, as Treasury Secretary Timothy Geithner has told interviewers, “Those proposed changes in [the Bush] tax rates would apply to only 2 to 3 percent of small-business owners across the country. Ninety-five percent of small-business owners … have incomes below that threshold of $250,000.” (see: http://tiny.cc/nec1p )
Obviously the Secretary doesn’t know much about the anatomy of small business job creation.
As Americans for Tax Reform has noted (same story as in prior link), “Fully two-thirds of small business profits (and thus the small business sector of the economy) pay taxes in households Obama wants to raise taxes on.… Breaking it down further, it’s $0.40 out of every $1.00 in sole proprietor profits. It’s $0.90 out of every dollar of business partnership and S-corporation profits.”
If the proportion of owners coming under the tax is so small, why is the proportion of dollars so large?
For at least four decades, small businesses have accounted for most job growth in the United States. This counterintuitive phenomenon was identified in the late 1970s by David Birch, at the time an MIT researcher. Seeking to understand the textures of the economy, Birch mined the Dunn & Bradstreet database. He found that, in the periods he studied, a considerable majority of net new U.S. jobs came from businesses that began the period with five or fewer employees.
As the years passed, Birch looked more closely at those job-creating companies. He discovered that within the entire population of small companies a relative few were responsible for the great bulk of all that job growth. By and large, these were firms that started a period with at least $100,000 in sales and at least doubled in size every year for four years. Birch termed them Gazelles. Recent data suggests that when the recession began there were about 375,000 such firms in the United States (see: http://tiny.cc/wcq3k ), or about three percent of the 12 million U.S. companies that at the time employed fewer than one hundred people.
In other words, the two or three percent of small business owners that Mr. Geithner so cavalierly dismisses in justifying higher taxes “on the rich” are precisely the people responsible for the vast majority of the small business job creation the administration so fervently seeks to encourage. No tax increase was ever as exactly targeted.
But if targeting to stall current growth can be exact, targeting to promote future growth is a fallacy. As reported in Inc. magazine nearly a decade ago (see: http://tiny.cc/wcq3k ), some Gazelles are in high tech, but many are not. Some receive venture backing, but more do not. Often they are young firms. But some are as much as three decades old. Most are small, but some, like Cisco at the time, are very big.
The point is that, if you want to maximize job growth, not just take over the small business sector the way the administration seems to want to take over everything else, you do not follow the White House plan of targeted loans and tax cuts. Instead, you cut taxes broadly and uniformly and let the millions upon millions of decisions that a free people make in a free economy every day determine who rises and who falls.
Even Snooki, in her fashion, grasps that.