small business

The recent political conventions have included a plethora of rhetoric about how each political party is going to make the economy stronger. Unfortunately, neither party adequately discussed the most important engine of economic growth. That engine is small businesses.

Employment by the Fortune 500, the largest corporations in the US, has been approximately 16% of total US employment for the last ten years. Employment by businesses not in the Fortune 500 has grown by about 6 million since 2005.

But one of the interesting – and alarming – trends in the last few years among larger small businesses is a reluctance to grow. When I started consulting with small businesses in 1992, the primary focus of most of my clients was growth. This was in large part due to the fast growing economy of the 1990s.

Much of this entrepreneurship was stimulated by the Reagan tax cuts that directly affected the amount of taxes small businesses paid. Since most small businesses are taxed at the personal tax rate, lower tax rates in the higher tax bracket motivate small businesses to take risks and expand.

Much less publicized was the significant amount of government regulation that Reagan eliminated during his Presidency. Reducing regulations allowed small business owners to devote resources to growing their businesses, not complying with the productivity-destroying regulations of over-aggressive bureaucrats.

After the recession of 2008-2009, many of my clients began to restrain their growth. When they reached capacity, they delayed investments in expansion or simply refused to expand. In many cases, they expressed that it simply was not worth the risk when more than half of any incremental earnings would go to a variety of taxes.

This problem was complicated by Obamacare which increased regulation and health cost for any company with more than fifty full-time equivalent employees. (A full time equivalent is a full-time worker or multiple workers who work 40 hours per week.) Now, in addition to higher taxes, adding employees also brought with it more regulation, paperwork, and a legal requirement to provide healthcare.

The level of new regulations and paperwork that my clients face now versus five to ten years ago is stunning. There is not a month that goes by where I do not have a client hand me a government form that requires the small business to file more paperwork to comply with another new regulation or represent an attempt to extort even more money out of the business from a local, state, or national entity. Most of these reports ask for obscure and essentially meaningless information. All of them have the hidden agenda of trying to catch the business owner not complying with some silly regulation that most often the business owner has never even heard of. It is “government gotcha” at its best.

No matter what their background or experience, small business owners who want to survive quickly learn to invest their money where they get a return. Similarly, if the combination of high taxes and over-regulation makes an investment less attractive, they will choose not to expand.

If you remove startups from the equation, employment growth among small businesses has been very slow since the last recession. And, honestly, many of the recent startups represent people who have become self-employed as contractors because they cannot find full time employment. They are really employment alternatives, not small businesses in the traditional sense.

The engine of employment growth, the small businesses of 5- 30 employees, have not added employees at the same rates as they did over the fifty years prior to 2009.

Business owners, especially small business owners, are the engine that drives economic growth of the US. Historically, they are the source of most new job creation in this country. It is their energy, creativity and entrepreneurial talent that makes our economy grow. Regulatory and tax policies that inhibit the growth of these businesses is a major reason for the lack of economic growth in the US.

Government programs have a high financial and social cost, and they are much less effective at stimulating economic growth. Ronald Reagan is more known for his tax cuts than for eliminating large amounts of silly government regulation. But history shows that his attack on over-regulation had a huge impact on the economy because it stimulated the grow of small businesses.

It is also worth noting that all small business owners are not filthy rich. In fact, most owners of smaller businesses are members of the middle class. The policies of the last decade of government have rewarded the very rich and helped the poor. The middle class and small business owners have been penalized.

Thus far neither political party has clearly indicated how they are going to make the government friendlier to small businesses. Unless the party that wins takes actions to help small businesses, the economy will continue to grow sluggishly – at best – because small businesses are what stimulates economic growth in the US.