Barbara’s Blog

Luddites were 19th century English textile workers who smashed the newly invented machines they feared would replace them. We now know that machines and other technology are enhancements used to increase productivity and don’t necessarily replace workers. Still, the post-recession economy may prove the Luddites right.

Technology replacing workers
New machines, software, cloud applications, and other technologies continue to debut. They help to make companies run more efficiently and, in many cases, using fewer workers. Earlier this year, AP reported “Some occupations are beneficiaries of the march of technology, such as software engineers and app designers for smartphones and tablet computers. Overall, though, technology is eliminating far more jobs than it is creating.”

Other findings by AP:

• Technology is enabling startups to launch with one-third fewer employees than in the 1990s
• Companies in the S&P 500 Index grew profits post-recession by one-third while cutting their payrolls in half

Low-paid workers
Those who have jobs may not have enough spending money to oil the economy. Kiplinger reported that 28% of workers are in jobs that earned them less than the poverty level (this is 5% more than in 2002). The Kiplinger Letter had it right: “An economy can’t grow if too many workers don’t have money to spend.”

The answer from some economists and politicians has been to raise the minimum wage. However, many small business owners have said that a higher minimum wage will force them to use fewer workers. What’s the right answer? I don’t know.

Conclusion
Early in the last century, the story goes that Henry Ford paid his workers $5 an hour, an unprecedented sum for the times, so that they could afford to buy the cars he sold. The real story (the reason for the high pay and how it was figured) may be somewhat different, but the lesson seems sound. In the short run, replacing workers with technology and paying low wages are helpful to the bottom line. I’m no economist, but it seems to me that in the long run, there may be few left to buy what we have to sell. The Luddites in the 19th century were concerned with their jobs; now it seems that they had a point when it comes to the economy.

Some sources say that the U.S. has started to run out of entrepreneurs.

The number of startups among American-born individuals is not growing as in the past.

For example, one study found that entrepreneurship among veterans has been declining steadily over the past two decades.

However, entrepreneurial talent is still abundant in foreign-born individuals. Some foreigners come to the U.S. for college and want to remain to launch businesses; others wish to move here to start businesses.

Still, the number of foreign-born entrepreneurs is slipping. A Kauffman Foundation report found that

“the proportion of immigrant-founded companies nationwide has slipped from 25.3% to 24.3% since 2005. The drop is even more pronounced in Silicon Valley, where the percentage of immigrant-founded start-ups declined from 52.4% to 43.9%.”

One of the main problems appears to be the current U.S. visa system. It is not friendly to entrepreneurs. Sure, there’s an H-1B visa for employees. Companies must prove that they control the worker, with the right to fire him or her (something an entrepreneur working for his own company can’t do).

Then there’s the E-2 visa for investors. It requires substantial investments in order to qualify (again, something that many entrepreneurs may not be able to do). But unlike in countries such as Canada and New Zealand, there is no special U.S. visa for entrepreneurs.

Bill to permit visas for entrepreneurs

Startup Act 2.0 is a bill introduced last year that would allow visas to be issued to entrepreneurs. The requirement for the visa: Invest $100,000 and create at least two jobs within the first year of the visa. The visa would last for four years. As long as the entrepreneur employed, on average, five full-time (non-family) employees during this period, he or she would then be eligible to obtain a green card (permanent residency). The bill calls for the issuance of 75,000 entrepreneur visas and eliminate per-country quotas.

The bill had bipartisan support from the likes of Sens. Mark Warner (D-VA) and Marco Rubio (R-FL). It remains to be seen whether the measure will be renewed in the new Congress.

Tax breaks to encourage entrepreneurship

The Startup Act 2.0 would go beyond visa assistance for foreign-born entrepreneurs. It would give every entrepreneur (native born or foreign born) access to the following tax breaks:

• 100% capital gains tax exclusion for stock in a C corporation held more than five years (a tax break that applied in 2011; currently the exclusion is only 50%). The break would apply only to qualified small businesses, such as tech companies and manufacturers.
• A special research credit for startups with less than $5 million in annual receipts and less than five years old.
• A tax credit to encourage employment. It would be up to $250,000 or 20% of W-2 wages, whichever is less.

Final thought

As the new Congress begins to consider the issue of immigration, let’s hope that attention is paid to the need to create a special entry process for entrepreneurs.

Small business owners may complain throughout the year about taxes, government regulations, and the economy; I know I do. On this day of Thanksgiving, it is a good idea to remember all of the things we have to be thankful for in the United States. Here are some you may have overlooked:

Taxes could be higher
We gripe about our current tax rules and the Medicare additional taxes poised to start for high-income individuals on January 1 of next year. Sure, these will be a burden on successful business owners and may impede their ability to hire more people, invest in equipment, and make capital improvements. And corporate tax rates in the U.S. are the highest of any of our leading trading partners.

But rates on individuals could be higher. According to one source, France’s top rate is 48% (with a proposed “supertax” of 75% on those making more than one million Euros), and Spain’s top rate is 52%. Western Europe on average has a top individual income tax rate of 46.1%. This compares with our current top rate of 35% (which could rise to 39.6% in 2013 unless Congress maintains the status quo).

And the top corporate tax rate may come down in the near future. President Obama has, from time to time, supported a reduction in this rate to 28% (and even lower for manufacturers). This could become part of comprehensive tax reform undertaking in 2013.

Regulations could be worse
Over the past decade, the federal government has issued about 38,000 new final regulations to govern not only businesses but virtually every other aspect of daily activity. Many small business owners complain that some regulations are choking the life out of their companies. But it could be worse. The WEF Global Competitiveness Index survey ranked the United States in the middle of Organization for Economic Co-operation and Development (OECD) countries in terms of regulatory burden.

For a report on 2013 regulations on small and mid-size businesses worldwide, go to DoingBusiness.org.

And there are some in Congress who are speaking out against regulations that lack common sense (i.e., those that impose heavy fines for violations without first issuing warnings). Hopefully the regulatory climate will improve.

Interest rates and inflation are low
Two of the key killers to business growth are high interest rates and high inflation. Fortunately, neither exists at the present time. Of course, deficit concerns could result in inflation heating up (which is a way for the federal government to resolve its debt problem), but that probably won’t happen anytime soon.

Freedom to pursue dreams is still alive and well
November is Entrepreneurship Month and a good time to remember that the U.S. is still the land of opportunity. Anyone, regardless of age, sex, national origin, religion, or education, can start a business and achieve success.

According to the Global Entrepreneurship Monitor (GEM), the U.S. continues to display the environment supportive for business startups. While there are countries with better startup-rates and more business-friendly environments, there are many where things are worse. All in all, we don’t have it so bad.

Happy Thanksgiving to all!

On October 3, President Obama and Governor Romney met in a 90-minute debate focused on the economy. Questions touched on the economy, taxes, the deficit, energy, and education.

Each candidate talked a little about small business. How much is a little?

If my count is correct, President Obama mentioned the term “small business” six times, while Governor Romney did so eight times. But it was not the number of times small business was mentioned, but the substance of the comments that caught my ear.

I usually don’t get political when it comes to discussions about small business. However, I think some reasoned analysis is called for now.

Here’s my takeaway:

The President referred to Tax Code changes that helped small businesses, stating he lowered taxes for small businesses 18 times (while it is true that there have been some targeted tax breaks for small business, I couldn’t find those 18 separate times).

While saying he would not raise taxes on 97% of small business owners, he also referred to Donald Trump as a rich “small business owner.” This statement is perplexing and I’m sure that Trump would probably disagree with the President’s characterization of him. But if the President was basing his remark on the fact that the Small Business Administration (SBA) defines a small business as a company with up to 500 employees, then technically Trump might fit the bill (I haven’t seen his payroll).

What bothers me about the statement is that he could fit the bill. If so, then the President’s agency, in my opinion, should revise the definition of a small business to look at more than just the number of employees and take into account revenues and assets when classifying a company as a small business eligible for SBA-guaranteed loans and other programs.

Governor Romney noted that small business startups are down to a 30-year low and that this is a reason why jobs are not being created to the extent that they should (note that historically small businesses have created 60% to 80% of all new jobs).

He also pointed out that 54% of Americans work for small businesses in which owners pay taxes on profits on their personal tax returns (i.e., at personal income tax rates and not at the corporate rate); raising taxes on “wealthy” owners would further stymie job creation.

Small business owners I’ve talked to have indicated that they are staying on the sidelines when it comes to hiring because they don’t know what it’s going to cost them for doing so—in health care, taxes, and regulations.

Bottom line: It’s easy to say you support small business. It’s like mom or apple pie; no one is against it. But let’s see which candidate can walk the talk! I think that the debate provided an answer, but I’ll be watching to learn what others are concluding.

During the political conventions, both parties promised a new tomorrow for small businesses. Unfortunately, there is an unhappy small business community today. According to results from the recent SurePayroll survey, most indicators are down:

• Optimism of small business owners in August was at 60%, which represents a 2% decline from July.
• Hiring in August (compared with July) was down by 0.1% (and paychecks for employees was down by 0.2%)
• Only 18% of small businesses sought loans in 2012, and 32% of these had trouble obtaining them.

How does this play against the political backdrop?

Democratic Party platform
The Democratic Party platform related to small business states:

“Small businesses employ half of all working Americans, and, over the last two decades, have created two out of three net new jobs. Democrats believe that small businesses are the engine of job growth in America. President Obama signed 18 small-business tax cuts to encourage businesses to hire more workers and make job-creating investments in machinery and equipment and proposed significant additional small business tax relief. He encouraged investment and supported start-ups by allowing businesses to write off the full cost of new equipment and machinery they bought in 2011. Altogether, the President’s Small Business Jobs Act accelerated $55 billion in tax relief through 2011. Democrats made it easier for small businesses to access the loans they needed to grow and hire. The President signed into law changes to help entrepreneurs raise capital while maintaining key investor protections. Small businesses are now once again creating jobs. Democrats have helped small businesses provide health insurance to their workers with a tax credit to help pay for the cost of coverage. In 2014, the tax credit will grow and small businesses will be able to pool their purchasing power together to get affordable coverage.

We recognize the importance of small business to women, people of color, tribes, and rural America and will work to help nurture entrepreneurship.

President Obama and the Democratic Party are committed to continue cutting red tape for small businesses, helping them sell their goods around the world and access the capital they need to grow. This includes tax cuts for small businesses that make new investments, hire more workers, or increase wages.”

GOP platform
The GOP platform related to small business and entrepreneurship states:

“America’s small businesses are the backbone of the U.S. economy, employing tens of millions of workers. Small businesses create the vast majority of jobs, patents, and U.S. exporters. Under the current Administration, we have the lowest rate of business startups in thirty years. Small businesses are the leaders in the world’s advances in technology and innovation, and we pledge to strengthen that role and foster small business entrepreneurship.

While small businesses have significantly contributed to the nation’s economic growth, our government has failed to meet its small business goals year after year and failed to overcome burdensome regulatory, contracting, and capital barriers. This impedes their growth.

We will reform the tax code to allow businesses to generate enough capital to grow and create jobs for our families, friends and neighbors all across America. We will encourage investments in small businesses. We will create an environment where adequate financing and credit are available to spur manufacturing and expansion. We will serve as aggressive advocates for small businesses.”

Bottom line
It is great to see both parties acknowledging the importance of small business to the U.S. economy. This rhetoric is great, but actions following the election are the only meaningful thing for small business and our country.

It’s vital for small business owners to assess whether the last four years of a Democratic Administration have been helpful to their companies and the economy, and to decide which party going forward can better serve small business interests. Vote accordingly.

How big is small business? Is entrepreneurship on the ascendency?

There is much conflicting information in the media. Here are some of the facts from or based on government sources:

All businesses in the U.S.

The Joint Committee on Taxation’s report on choice of entity found that the “vast majority” of businesses in the U.S. are sole proprietorships, with more than 22.6 million non-farm sole proprietorships in 2009 out of 33.6 million total business returns.

There were:

• 1.7 million C corporations (some of which are mega-public companies)
• 1.9 million farms
• 3.1 million partnerships (which includes limited liability companies)
• 4.1 million S corporations

The number of pass-through entities (businesses structured so that profits and losses are taxed on owners’ personal returns) has nearly tripled since 1987.

Startups

The SBA says that from 2007 to 2010, the rate of startups declined by 12%. In 2008, the startup rate fell below 3% in a quarter (compared with the previous quarter) for the first since tracking began in the 1990s. The latest startup rate for which data is available is 2.7% in the second quarter of 2011.

A Kauffman Foundation report found that new firms (less than five years old) were 35% of all companies in 2010 as compared with 49% in 1982.

States with the best business climates:

• Small Business & Entrepreneurship Council Report found that South Dakota, Nevada, Texas, Wyoming, and South Carolina were the top five locations.
• The Tax Foundation Report found that Wyoming, South Dakota, Nevada, Alaska, and Florida were the top five locations.

Bankruptcies

It appears that bankruptcy filings in federal court are on the wane. According to court statistics, there were 13% fewer filings for the 12-month period ending March 31, 2012, as compared with the previous 12-month period.

Comment on the numbers

Like a Georges Seurat painting, statistics create the broad picture of the state of business today. However, each little dot in the picture is a unique entity on which an owner has pinned his or her hopes, dreams, and financial resources.

Anecdotal stories that I hear from entrepreneurs around the country continue to show three main themes: strong desires to start a business, continued struggles to keep a company going, and, unfortunately, failures (folding a company, selling out, or going into bankruptcy).  There’s no single statistic that can capture the state of small business today.

The U.S. Small Business Administration (SBA) releases quarterly statistics on business churn. What is this and why should you care about it? Business churn is defined as changes in the number of births and deaths of firms in this country. When business births (startups) increase and business deaths decline, the resulting rise in the number as business churn is good. “Business churn is needed to keep the economy from stagnating,” says the SBA.

Business births are vital for employment creation. The government says that small firms (20-499 employees) were responsible for three-quarters of job creation from the end of the economic downturn (from 2009 on). However, now (since 2011) even smaller firms (1-19 employees) are creating jobs.

Business bankruptcies—one of the ways in which businesses die—are on the decline for firms of all sizes. In the last quarter of 2011, there were 11,149 bankruptcies. In the first quarter of this year, there were only 10,998, showing that business deaths are on the decline.

Clearly, things are moving in the right direction. However, we are nowhere near pre-recession numbers in business creation. The number of unincorporated businesses created in 2011 is markedly below the number in previous years: 10,586,000 in 2006, 10,413,000 in 2007, 10,080,000 in 2008, 9,831,000 in 2009, 9,681,000 in 2010, and only 9,449,000 in 2011. It’s too early to pop the cork and celebrate the return of a strong economy, despite the statistical rise in business churn.

Word on the street (from small business owners I know) is that they are largely still just hanging on. They aren’t expanding. They aren’t hiring. They aren’t buying new equipment (other than what is absolutely necessary). There are “for rent” signs everywhere, with store fronts and office space showing significant vacancies. My personal view on business churn is not as rosy as the SBA’s, but I sure hope things change real soon!

Historically, data support the statement that all job growth comes from startups. More specifically, according to Bureau of Labor statistics from 1977 to 2005, startups (companies in existence for less than 1 year, which are almost always small businesses) add on average 3 million jobs annually while older companies lose 1 million each year. This is great information, but as Wall Street always says, “past performance is no guarantee of future results.” In this post-recession era, startups aren’t necessarily performing according to historic norms.

Where government should put its money
If startups create jobs, then it stands to reason that government should be supporting startup efforts. This would mean more funding for the SBA loan programs and SCORE et al., and new tax incentives for startups.

Unfortunately, Congress and the Administration have let small business down:

• Congress continues to extend unemployment benefits. While this is an admirable and perhaps necessary thing to do while jobs are scarce, the funds used to pay these benefits doesn’t create jobs.
• Funding for the SBA’s 90% loan guarantee program ran out of money and needs additional funding to continue.

It’s not clear whether tax breaks to encourage hiring are more of an illusion than a stimulus. The HIRE Act incentive (the “payroll tax holiday”) is credited with creating 4.5 million jobs, according to Treasury figures. Experts (including the Treasury’s chief economist Alan Krueger), however, question whether the jobs would have been created even if there had been not such incentive. Still, incentives such as this are needed badly to get small businesses to hire workers. Some tax and other incentives that come to mind:

• Slashing individual income tax rates (rather than raising them, as they are scheduled to do in 2011). Most small business owners pay taxes on business profits on their personal returns.
• End tax uncertainty. The delay in enacting the so-called extender bill has kept business tax planning in limbo. Until businesses can plan effectively, they won’t be adding to their payroll.
• Eliminate bookkeeping chores. Business owners don’t want to devote limited hours to being the government’s bookkeeper (e.g., starting in 2011 they will have to complete 1099s for any suppliers of goods and services of $600 or more).

As Winston Churchill said: “…for a nation to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.” When will “they” get it?

After the July 4 recess, the Senate postponed action on the Small Business Jobs Act of 2010 (H.R. 5297) until after they act on the finance reform bill.