Economist Argues Against Small Business Tax Relief

In the United States, the idea that small businesses are the principal driver of job growth is so accepted, it’s almost a myth.

“American small businesses create more than 70 percent of all new jobs annually,” states the Small Business Administration. And most economists –and politicians — seem to agree.

But a series of economic papers attacks that myth. Supporting the argument that tax breaks shouldn’t be directed to small businesses as a whole, but more specifically to start-ups, economist Martin A. Sullivan explains how “two new strands of academic research are quietly shredding the idea that policies to support small businesses hold the key to job creation.”

It Ain’t Size It’s Age

Sullivan goes on to describe the dynamics of employment growth in the U.S., especially cycle of “job creation and job destruction that occur as companies are being created and going out of business.”

Citing research from U.S. Census Bureau economists, Sullivan argues that start-up companies tend to exhibit either an ‘‘up or out dynamic.’’ And because young firms are naturally riskier and less established, their “job creation and destruction are far more volatile than mature firms.”

And that cycle of creative destruction “keeps the economy moving toward higher productivity” by creating opportunities for new firms as older firms shed and consolidate jobs as they mature.

When it comes to job growth, age matters more than size, in other words. Jobs are created not just by small businesses, but new small businesses, particularly start-ups.

Tradespeople, Not Entrepreneurs

Sullivan goes on to cite another study that comes to the same conclusion — small businesses aren’t America’s real job creators.

“Small businesses are mainly skilled craftspeople, lawyers, doctors, real estate agents, shopkeepers, and restaurateurs,” the National Bureau of Economic Research has concluded in a paper.

“These businesses do little innovation. They provide relatively standardized goods and services for existing customer bases. The researchers also found that once established, most small firms do not grow or are not expected to grow.

“Moreover, many of them do not want to grow. One reason for this is that many small business owners got into the business for themselves for non-pecuniary benefits such as wanting a flexible schedule or to be their own boss.

The Real Angle: Attacking Small Business Tax Relief

Sullivan uses these findings to support a political angle: to argue against small business tax incentives.

“Even if tax cuts for high-bracket taxpayers could be targeted to small businesses, which they can’t, they would still be ineffective because they are not targeted to the subset of small businesses that actually are responsible for creating jobs,” he argues.

“Put differently, tax relief for taxpayers in upper-income brackets is unlikely to help job creators, because these provisions provide tax relief to high-bracket non-employer income, and much of the employer income that does benefit goes to mature firms that don’t play a significant role in job creation.

There’s certainly still a myriad of reasons for creating public policy that supports small businesses, he thinks. But these economists are seeing subsidies granted to companies for “simply being small” as “misguided.”

“It would be far better to direct subsidies to the subset of small businesses that aspire to grow and innovate.”

What do you think? Is there merit to be gained from refining our attitude towards small businesses and start-ups, or is this sort of argument simply politically biased? Is your company a start-up, and does your experience support or refute the findings here? Sound off in the comments and let us know your thoughts.
Originally published: Jan 5, 2012

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