Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul. He is the author of "The Benefit and the Burden: Tax Reform — Why We Need It and What It Will Take."
The Small Business Administration recently refined its definition of a "small business" for the purposes of qualifying for federal aid and contract set-asides. Depending on the industry, a small business may be defined by the number of employees, receipts, assets or other factors. The new definitions are industry-specific.
Today's Economist
Perspectives from expert contributors.
About 8,350 companies are believed to be newly eligible for the small-business designation, according to a Bloomberg Government article published in The Washington Post. Among those affected, 958 engineering and technical services contractors that were previously considered large businesses will now be considered small. In 2011, $220 million in federal contracts for engineering and technical services were reserved for small businesses.
Census Bureau data show that 78 percent of businesses have no employees. Among those with employees, three-fifths have one to four employees, and 98 percent have fewer than 100. However, half of all workers are employed by large companies (those with more than 500 employees), and a third work for very large companies (those with more than 5,000 employees).
Census BureauHistorically, Congress's main interest in the small-business sector has been its job-creating potential. This has been the case since 1981, when the economist David Birch published an article asserting that small businesses created the vast bulk of jobs in the economy. Since then it has been an article of faith among policy makers that private-sector job creation strategies should concentrate on small businesses.
Actually, what Mr. Birch really showed is that young companies are more likely to be job creators than mature companies. He also showed that such companies are highly volatile in terms of net job creation; many of the jobs that are lost are lost among recent start-ups.
More recent research by the economists John Haltiwanger, Ron Jarmin and Javier Miranda confirms that this is still the case.
Insofar as job creation is concerned, another important factor is establishment size. A new study from the Bureau of Labor Statistics finds that over the last 10 years new companies have tended to be smaller and stay smaller than those in the past.
In the 1990s, new start-ups averaged 7.6 employees, falling to 6.8 in 2001 and just 4.7 in 2011. Among all businesses, establishment size fell from an average of 17.5 in 2000 to 16.6 in 2003 and 15.7 in 2011.
The B.L.S. has also found that the number of new establishments has fallen sharply since 2006. The number of those less than one year old fell to 505,473 in 2010 from 667,341 that year. The number of jobs created by such companies has fallen to less than 2.5 million in 2010 from 4.7 million in 1999.
If the pace of new businesses and job creation by such businesses were at 1990s levels, we would have created some two million additional jobs this year.
Bureau of Labor StatisticsCongress is, of course, always keen to find ways of aiding small businesses, which are akin to mom and apple pie in its eyes. Just recently, it approved the JOBS Act, which is intended to ease access to credit by "emerging growth" companies.
Congressional Republicans are anxious to enact a new tax cut for small businesses, as well. The Small Business Tax Cut Act, which was reported out by the House Ways and Means Committee on April 10, would give a one-year, 20 percent tax cut to every business with 500 or fewer employees.
The Joint Committee on Taxation estimates that it will reduce federal revenues by $46 billion. The committee report offered virtually no rationale for the legislation other than that small businesses are good and deserve a tax cut, period.
The linkage between a small business's tax burden and job creation, however, is tenuous at best. This stands to reason, since business start-ups, the prime engines of small-business job creation, seldom have any profits to tax; most start-ups lose money for the first several years.
And since labor costs are already deductible as a normal business expense, there is no reason to think that lowering a business's overall tax burden, especially if it is just for one year, will have any effect whatsoever on the number of workers it employs.
Moreover, the proposed small-business tax cut would skew its benefits overwhelming toward highly profitable businesses that just happen to have a small number of employees. As Steven T. Dennis noted in Roll Call, Oprah Winfrey, a billionaire, would get a big tax cut, because her production company employs about 400 people, and so would the New York Giants, which has about 210 employees and made $1.3 billion last year.
The Tax Policy Center estimates that the benefits would accrue overwhelming to the wealthy, with 49 percent of the total tax cut going to those making more than $1 million.
There may be policies that would increase the number of business start-ups and aid employment this way. But an across-the-board tax cut for every small business, defined only in terms of employment, is nothing but an election-year giveaway unlikely to create any jobs whatsoever.
E-mailPrintRecommendShare CloseTumblrDiggLinkedinRedditPermalink Bruce Bartlett, Daily Economist, job growth, politics, Small Business Administration, small businesses, Start-ups (Des);, tax cuts, taxes Related PostsFrom EconomixTax Code Not Aligned With Basic PrinciplesThe ‘Tax Gap’Britain’s Experience in Raising the Top Tax Rate The Origin of Modern Republican Fiscal PolicyWould a Higher Top Tax Rate Raise Revenues? Previous Post For Two Economists, the Buffett Rule Is Just a Start// jQuery(document).ready(function($) { NYTD.commentsInstance = new EmbeddedComments($, 'NYTD.commentsInstance'); NYTD.commentsInstance.init({configName: 'default'}); }); // /**/// if ((typeof adxpos_SponLink2 == "undefined") || (typeof adxads[adxpos_SponLink2] == "undefined")) { if($("SponLink2")) { $("SponLink2").hide(); } } // /**/// if ((typeof adxpos_Position1 == "undefined") || (typeof adxads[adxpos_Position1] == "undefined")) { if($("Position1")) { $("Position1").hide(); } } //Search This Blog Search Previous Post For Two Economists, the Buffett Rule Is Just a StartFollow This BlogTwitterRSS /**/// if ((typeof adxpos_XXL == "undefined") || (typeof adxads[adxpos_XXL] == "undefined")) { if($("XXL")) { $("XXL").hide(); } } // In order to view this feature, you must download the latest version of flash player here.var so = new SWFObject("http://graphics8.nytimes.com/packages/flash/business/20090302-econ-indicators-graphic/econIndicators.swf","nytSWF", 334,290,9,"#FFFFFF"); so.addParam("allowScriptAccess","always"); so.addParam("allowFullScreen","true"); so.addParam("BASE","http://graphics8.nytimes.com/packages/flash/business/20090302-econ-indicators-graphic/"); so.addVariable("allowCaching",true); so.write("embed70");#embed70{visibility:visible !important;}h2.multiHeadline {font-size:156% !important;padding:0px 0px 7px !important;margin:6px 6px 11px 3px !important;border-bottom:1px solid #CCCCCC !important;} /**/// if ((typeof adxpos_MiddleRight == "undefined") || (typeof adxads[adxpos_MiddleRight] == "undefined")) { if($("MiddleRight")) { $("MiddleRight").hide(); } } //EconomixThe latest from Times reporters and editors. /**/// if ((typeof adxpos_Spon3 == "undefined") || (typeof adxads[adxpos_Spon3] == "undefined")) { if($("Spon3")) { $("Spon3").hide(); } } // Loading Twitter messages...// var twitterReaderVar={widget_id:"4",sidebar_id:"sidebar-2",widget_name:"nyt-twitter",avatar:"show"};if(typeof twitterReader=="undefined"){twitterReader=new Array()}twitterReader.push(twitterReaderVar); //Featured Do Small Businesses Create Jobs?A proposal to cut taxes for small businesses would large
Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul. He is the author of "The Benefit and the Burden: Tax Reform — Why We Need It and What It Will Take."
The Small Business Administration recently refined its definition of a "small business" for the purposes of qualifying for federal aid and contract set-asides. Depending on the industry, a small business may be defined by the number of employees, receipts, assets or other factors. The new definitions are industry-specific.
Today's Economist
Perspectives from expert contributors.
About 8,350 companies are believed to be newly eligible for the small-business designation, according to a Bloomberg Government article published in The Washington Post. Among those affected, 958 engineering and technical services contractors that were previously considered large businesses will now be considered small. In 2011, $220 million in federal contracts for engineering and technical services were reserved for small businesses.
Census Bureau data show that 78 percent of businesses have no employees. Among those with employees, three-fifths have one to four employees, and 98 percent have fewer than 100. However, half of all workers are employed by large companies (those with more than 500 employees), and a third work for very large companies (those with more than 5,000 employees).
Historically, Congress's main interest in the small-business sector has been its job-creating potential. This has been the case since 1981, when the economist David Birch published an article asserting that small businesses created the vast bulk of jobs in the economy. Since then it has been an article of faith among policy makers that private-sector job creation strategies should concentrate on small businesses.
Actually, what Mr. Birch really showed is that young companies are more likely to be job creators than mature companies. He also showed that such companies are highly volatile in terms of net job creation; many of the jobs that are lost are lost among recent start-ups.
More recent research by the economists John Haltiwanger, Ron Jarmin and Javier Miranda confirms that this is still the case.
Insofar as job creation is concerned, another important factor is establishment size. A new study from the Bureau of Labor Statistics finds that over the last 10 years new companies have tended to be smaller and stay smaller than those in the past.
In the 1990s, new start-ups averaged 7.6 employees, falling to 6.8 in 2001 and just 4.7 in 2011. Among all businesses, establishment size fell from an average of 17.5 in 2000 to 16.6 in 2003 and 15.7 in 2011.
The B.L.S. has also found that the number of new establishments has fallen sharply since 2006. The number of those less than one year old fell to 505,473 in 2010 from 667,341 that year. The number of jobs created by such companies has fallen to less than 2.5 million in 2010 from 4.7 million in 1999.
If the pace of new businesses and job creation by such businesses were at 1990s levels, we would have created some two million additional jobs this year.
Congress is, of course, always keen to find ways of aiding small businesses, which are akin to mom and apple pie in its eyes. Just recently, it approved the JOBS Act, which is intended to ease access to credit by "emerging growth" companies.
Congressional Republicans are anxious to enact a new tax cut for small businesses, as well. The Small Business Tax Cut Act, which was reported out by the House Ways and Means Committee on April 10, would give a one-year, 20 percent tax cut to every business with 500 or fewer employees.
The Joint Committee on Taxation estimates that it will reduce federal revenues by $46 billion. The committee report offered virtually no rationale for the legislation other than that small businesses are good and deserve a tax cut, period.
The linkage between a small business's tax burden and job creation, however, is tenuous at best. This stands to reason, since business start-ups, the prime engines of small-business job creation, seldom have any profits to tax; most start-ups lose money for the first several years.
And since labor costs are already deductible as a normal business expense, there is no reason to think that lowering a business's overall tax burden, especially if it is just for one year, will have any effect whatsoever on the number of workers it employs.
Moreover, the proposed small-business tax cut would skew its benefits overwhelming toward highly profitable businesses that just happen to have a small number of employees. As Steven T. Dennis noted in Roll Call, Oprah Winfrey, a billionaire, would get a big tax cut, because her production company employs about 400 people, and so would the New York Giants, which has about 210 employees and made $1.3 billion last year.
The Tax Policy Center estimates that the benefits would accrue overwhelming to the wealthy, with 49 percent of the total tax cut going to those making more than $1 million.
There may be policies that would increase the number of business start-ups and aid employment this way. But an across-the-board tax cut for every small business, defined only in terms of employment, is nothing but an election-year giveaway unlikely to create any jobs whatsoever.
A proposal to cut taxes for small businesses would largely benefit the well-off and would do little to create jobs, an economist writes.
Men’s and women’s attitudes diverge on a number of policy and political issues, and as Mitt Romney has courted social conservatives that gap has become more apparent, an economist writes.
Some Republicans have indeed put forward some serious alternatives to President Obama’s plans for health care reform, though it is not clear if or how well they might work, an economist writes.
Banks’ out-of-control risk-taking and the government’s failure to rein them in created many problems, which critics of government spending are now using as an excuse to attack Medicare, an economist writes.
Mitt Romney has noted that women’s jobs account for 92.3 percent of the net job loss since President Obama took office. But as a picture of the recession and its aftermath, that number is misleading.
Floyd Norris, the chief financial correspondent of The New York Times and The International Herald Tribune, covers the world of finance and economics.
Catherine Rampell is an economics reporter for The New York Times.
Binyamin Appelbaum covers business and economic topics for the Washington bureau of The New York Times.
Annie Lowrey covers economic policy for the Washington bureau of The New York Times.
Motoko Rich is an economics reporter for The New York Times.
Each day, Economix offers perspectives from expert contributors.
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