NCPA - National Center for Policy Analysis

The Small Business Myth

October 22, 2010

It's not true that the key to boosting employment is to help small businesses, says Veronique de Rugy, a senior research fellow at the Mercatus Center at George Mason University.

According the Small Business Administration 99.7 percent of all employer firms are small (fewer than 500 employees).  Still, big companies -- the ones that employ more than 500 workers -- account for about half of the country's total employment.  In other words, new jobs come from small and big businesses.  If your goal is to boost jobs, it doesn't make sense to favor one over the other. 

In any case, the effectiveness of the policies aimed at helping small firms is dubious, which raises the question:  Are Obama's tax policies doing more to help small businesses or to hurt them?

  • According to the National Federation of Independent Business, two-thirds of small businesses report their business income through the personal income tax system.
  • Letting the Bush tax cuts expire means that these business owners will see their tax bill increase and will have less money to spend on hiring or keeping employees.

Why give with one hand to take back with the other?

Richard Fisher, president and CEO of the Federal Reserve Bank of Dallas, agrees.  In a July speech, he said:  "Businesses and consumers are being confronted with so many potential changes in the taxes and regulations that govern their behavior that they are uncertain about how to proceed downfield."

Federal Reserve data confirm this impression, says de Rugy.

  • Today businesses are sitting on $1.8 trillion in capital instead of investing it.
  • From 2008 to 2009, small-business capital expenditures plummeted by $63.6 billion, while owners' personal investments in their businesses fell by $2.5 billion following a decrease of $9.2 billion the previous year.

Neither small nor large businesses can flourish in an environment of anxiety about government intrusions and burdens.  To start helping American business, Obama needs to stop trying to help. 

Source: Veronique de Rugy, "The Small Business Myth," Reason Magazine, November 2010.

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