It’s undeniable that small business is the growth engine of the economy. The Small Business Administration reports that there are 22.9 million small businesses in the United States. The Bureau of Labor Statistics (BLS) states that 90 percent of all net job creation from 1996-2007 came from small businesses. There is little question that if the US is to recover from this recession and if unemployment is to be driven down, small business will have to lead the way.
Unfortunately, small businesses aren’t hiring right now. One of the main reasons is excessive government interference with the free market. The cost of doing business is driven up by over regulation. Pending changes create tremendous uncertainty. Complex tax codes and a legal system stacked against small business exacerbate the problem. However, there are some things that government could do to lighten the regulatory burden, reduce costs and get small business hiring again.
1. Repeal Obama Care – Obama Care is causing massive uncertainty for small businesses. Nancy Pelosi said, “We have to pass the healthcare bill so that we can find out what is in it.” Well, it passed and we still don’t understand the implications for small businesses. It’s hard to remember a time when there was less confidence. Businesses are reticent to expand in uncertain times.
However, there are a couple of things on which most interested observers can agree. First, there will be a significant increase in the reporting and paperwork burden that falls on small business. Second, the cost to small business of providing healthcare to its employees will rise. Teri Gutierrez, an insurance broker with The White Bear Group which works with small businesses says, “Requirements such as forcing companies to carry adult children on their parent’s policies until age 26 and mandating 100 percent coverage of certain procedures will drive up costs. There can be no other outcome.” Finally, another provision of the bill is to reduce the money that people can put into medical flexible spending accounts. This is nothing more than a disguised tax increase. Tax increases reduce consumer spending and stifle job creation. Repealing this unwieldy legislation would spur small business job creation.
2. Abolish labor unions – Labor unions promote the antithesis of job creation and economic growth. They extort above market compensation and force inefficiencies. Labor unions have decimated American automobile manufacturers and bankrupted multiple airlines. Admittedly, automobile manufacturers and airlines are not usually small businesses, but they are supplied by scores of small businesses which have been crippled by the damage done by big labor. In more recent years unions have focused on government jobs where the effects of their anti-competitive tactics can’t be seen on the bottom line. After all, government can simply raise taxes to support the inefficiency forced by unions.
There was a time in this country’s history when labor unions played an important role in protecting the exploited. That time has long since passed. The pendulum has swung much too far in the other direction. We support eliminating unions all together. At a minimum their power should be scaled back dramatically. For example, labor unions should be held to the same antitrust laws to which the companies with which they negotiate are held.
3. Reduce frivolous law suits – Unfortunately, in the current environment, there is a tremendous incentive for employees to file frivolous, but costly law suits. Consider an employee who is a member of a protected class and is terminated for poor job performance. He or she can easily find an attorney who will happily file a discrimination suit, regardless of the merits of the case. It costs the attorney almost nothing to file. It costs the plaintiff nothing because the attorney will take the case on a contingency basis.
The small business owner, who is the unfortunate defendant in this case, is faced with an unhappy choice. The entrepreneur could settle the meritless case for say $10,000 and put an end to the proceedings. Alternatively, he or she could pay a defense attorney to fight the suit. Even if the defendant were fortunate enough to prevail at summary judgment his or her costs might be $30,000 or more. Either way, the effect is to increase the cost of operating a small business and suppress job creation.
Legislation should be passed stating that a plaintiff who does not prevail has to pay the reasonable legal costs of the defendant. A further provision might state that if the plaintiff cannot afford this cost, it would have to be borne by the attorney who put forth the meritless case. Such legislation would not restrict access to the courts for people with a legitimate claim, but it would dramatically reduce meritless suits, lower costs for small businesses, and lead to more hiring.
4. Lighten the regulatory burden – There are literally dozens of regulations with which a business that has even a single employee must comply. Most have acronyms such as FSLA, HIPPA, FCRA, NLRA, ERISA, FICA, FUTA, USERRA, OSHA, IRCA…you get the idea. It’s enough to make an entrepreneur’s head explode. Worse, many of these regulations are not simple, straightforward, or clear. For a small business to be completely compliant, almost certainly requires the use of highly paid experts.
Historically, most small business owners have coped with these regulations by ignoring them. This strategy has worked well for years, but the ignorance-is-bliss approach to regulation may be less effective going forward. The Obama administration is spending hundreds of millions of dollars to beef-up enforcement. The administration seems to view levying fines on small businesses as a source of funds to support their spending plans. If government moves quickly to significantly lighten the regulatory burden on small businesses, it will clear the way for increased hiring.
5. Dramatically simplify the tax code – Most small businesses are set up as LLC’s or Subchapter S Corporations. In those situations there is no distinction between personal taxes and business taxes. The current tax code, with all of its deductions, exemptions and credits is so complex that it can take weeks to sort through accurately. The alternative is to hire an expensive professional to complete the tax forms. In this case, the small business owner incurs significant expense and still has to spend days collecting all of the information needed by the professional tax preparer.
The government should dramatically simplify the tax code by eliminating all deductions, exemptions and credits (i.e., close all of the loopholes). The optimal solution would be a flat tax on income where a fixed percentage of every dollar of income is paid in taxes. However, as long as all of the complexities are eliminated, a progressive tax could still be used. In either case, the total taxes collected should not exceed current levels. The result would be a tax system that is much less expensive for individuals, for businesses and for the government to administer.
Admittedly, the suggestions above are bold, but hard times call for decisive action not more of the same. It is within the government’s power to spur job creation by small businesses, but not through massive spending initiatives. The way to get small business hiring again is for the government to pull back and let the free market, which created our economy, work.