So much of the discourse on the fiscal cliff has focused on the likely effects of rasing taxes on the middle class and the wealthy, which has overshadowed the bigger issue at hand: how to avoid raising taxes on the one vehicle that can get the economy moving — small businesses.
Simply put, the economy does well when small businesses thrive and create jobs. And small businesses thrive when they are given access to capital for growth. But small business lending has dramatically decreased since the 2008 crash, and currently, banks are approving only 10 percent of applications. There are alternative lending solutions for small business capital, however, many business owners do not know about those options.
Meanwhile, as much as policymakers aspire to create jobs, they are not driving initiatives to shake free the hold on small business lending. Moreover, many of the proposed tax increases and changes in small business tax reporting also work against economic recovery. Tack on the waiting game many small businesses are playing until they see what Washington will do, and you’ve got a stymied economic engine.
This also begs the question, do small businesses need capital to grow or just to survive?
What policymakers fail to realize is that most small business owners, who also employ most of the country’s workforce, declare their business profits on the owner’s personal income tax return and are taxed at the personal income tax rate. Given that the net income number for many will be over $250,000, the proposed tax hikes could have a dramatic effect on small businesses and the growth and hiring decisions they will make.
Another point policymakers overlook is that business owners will ultimately pass this cost on to the middle class by raising prices on goods and services, possibly triggering layoffs and stalling hiring. With the combined tax increases and the cut in spending, it equates to roughly half a trillion dollars being removed from our economy. The U.S. gross domestic product will fall, causing the U.S. to face a possible downgrade by Moody’s. If that happens, business lending will shrink to levels near or worse than those we experienced in 2008.
Other provisions could also have a dramatic effect on small business growth. For example, lowering small business expense limits (Section 179 reduction) will reduce technology and new equipment sales across the board. And although everyone agrees to some extent that government spending needs to be cut, we need to be careful about which areas are cut. If spending is cut in research and technology, it will weaken the country’s already fragile infrastructure and make it more vulnerable then it already is.
If anything, we should think about investing more in the country’s infrastructure to avoid potential environmental disasters that may threaten our cities. For instance, most of our power system is still above ground. This is one of the main reasons for the horrendous power outages after Hurricane Sandy. Moreover, investing in our outdated infrastructure will create jobs and help kickstart our economy.
The research and experimentation tax credit that’s currently on the chopping block would, if saved, create a fruitful playground for development and research for existing industries and new technologies. Without it, the country’s infrastructure could fall even more out of date.
One possible solution to facilitate more lending to businesses and start-ups without Congress’ help would be to increase the SBA guarantee to SBA lenders from 75% to 90% again. We saw this happen shortly after 2008, under the Obama stimulus measure, and the results proved effective as more banks increased loans to businesses. Its effects, however, were short lived as the provision expired in 2011.
In the group of finance companies that I own, we have seen more and more businesses apply for financing now for fear that capital will be harder and more expensive to access in the future. Whatever policymakers decide, they must avoid further stifling the small business community. If banks tighten up even more than they already have because of decisions made by Washington, we will not only see growth capital disappear from FDIC banks, but the capital for businesses to stay afloat will become more expensive by non-bank lenders. They must remember it is the driving force behind the poor economy and our economic woes. Prosperity will once again have a chance when the small business landscape is unbound.
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