7 Myths About the Economy, Jobs, Taxes and Small Business

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America’s Got Talent is the No. 1 show. Spider-Man is the No. 1 movie. “Call Me Maybe” is the top song in the country. Who’s the most popular guy in Washington, D.C.?

Why, me! The small-business guy. Everyone’s buzzing about me. That’s because I represent more than 20 million others who are supposedly just like me. According to the National Federation of Independent Business, my confidence is down. Oh, no! But don’t worry. The President and Congress are battling over ways to help me succeed. Hooray!

I appreciate everyone’s concern. And I certainly love the attention. But really, I don’t want to waste your time. My technology company has 600 small-business customers. And I agree that I probably don’t have the right to speak on behalf of the other 19,999,400 small businesses in the country. But then again, why not? I know that small businesses will be an important part of this year’s election. We’re already getting a lot of attention from the media. So let me help explain a few things. And put to rest a few silly myths about us.

Silly Myth #1: Small businesses collectively oppose higher taxes.

My customers sell scrap, provide roofing services, distribute machine parts, and build wrought-iron fences. These are good, hard-working people, and they also hate to pay taxes. Why? Because we are control freaks. We’re the ones with the TV remote. We do the barbecuing when family comes over, because our wives don’t know how to cook a steak as well as we do. And, as small-business people, we believe that we can spend our money more wisely than the government. But we do not oppose higher taxes. We know that the government, like our own businesses, requires revenue to run. And sometimes, like our own businesses, a rate increase is needed. But when I’m forced, every few years, to raise my hourly rates, I need to be darn sure I can explain why to my customers and justify the rate increase with added value. And that the increase won’t happen again for a long time. Small-business owners are looking for that same rationale from the government.

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Silly Myth #2: More taxes on the wealthy will significantly hurt the economy.

I hate taxes like the next guy. But the fact is that the President’s proposals are to let rates rise for those families who earn more than $250,000 a year and only on the income in excess of $250,000. So if a business owner brings home $350,000 per year, he’ll pay 5% more taxes on the extra $100,000 of income, or $5,000. That stinks, but it’s not the end of the world. Personally, I’d rather see that guy keep the $5,000 and spend it on a vacation, roof repairs, a diamond necklace for his wife, an upgrade to his accounting software, or to help this guy buy a new car already, for God’s sake. Oh, and hire more people because he’s the main guy doing that. Those are all things that would probably help the economy more than just giving the money to the government. But I don’t believe the additional tax rate will kill him or further wreck the economy. I just think that a lower (and, more important, long-term and stable) tax structure would help him a lot more.

Silly Myth #3: Small-business owners and other people who make $250,000 a year are wealthy.

No, they’re not. They’re not doing so bad, mind you. But they’re not wealthy. At least a third of that money will go to federal, state, and other taxes. The majority of what’s left will go toward tickets to The Dark Knight Rises, along with a large popcorn and a Coke. The remainder will go toward a mortgage, car payments, clothes, alimony, cable, Scientology fees, insurance, summer camp, a vacation, health care, and maybe, just maybe, a retirement account. Oh, and a college fund. It’s a good life, but not the high life. And, by the way, the people that I personally know who run businesses and make that kind of income easily work 14-hour days to make that happen. They have the pressure of people depending on them. They deal with many, many problems. They are stressed out. No one, with the exception of Scott Disick, just sits back and makes that money by doing absolutely nothing worthwhile.

Silly Myth #4: Tax incentives create jobs.

No, they don’t. Most of the small-business owners I know laugh at the government’s attempts to help them hire. A tax credit to hire someone is nice, but if we don’t need the person, we’re not going to hire him just because a credit is offered. Here’s why: I still have to pay the employee’s salary and benefits. So I’m still significantly out of pocket, despite the tax credit. Even Jared Bernstein, a former economic adviser to the President, admits that there’s no hard data to support that tax incentives create jobs. The government can’t make me create a job for someone. Only more demand can do that. Or a request from my largest customer to hire his kid for the summer.

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Silly Myth #5: All government incentives are useless.

That’s not true either. Some work. Extending the popular Section 179 deduction that allows smaller companies to immediately write off the purchase of certain capital equipment and investments is helpful. Credits for research and development really do spur research and development. Targeted tax relief in certain urban zones can attract businesses to build and invest. Easing of rules (like the “Quick App” for bond guarantees from the Small Business Administration) helps us get money faster.

Silly Myth #6: The Senate’s Small Business Jobs and Tax Relief Act will create 990,592 new jobs.

Not 990,593? What about that poor guy? I’ve done my own calculations, and I think it will actually be 990,589. So there! I mean, really, is anyone believing this data? Our government cannot even balance its own budget by a trillion dollars, but it can predict the number of new jobs that would be created by a proposed legislation to that degree of certitude? Wow! The fact is that small-business owners don’t believe most of the predictions provided by the government (or its research organizations) any more than we believe that professional athletes are braver than the average guy. We hear about the upcoming “taxmageddon” and the “fiscal cliff,” and we know that the people predicting disaster were the same people who predicted that last summer’s credit downgrade of U.S. debt would be calamitous. (It wasn’t.) And where were they prior to the 2008 financial meltdown? The latest financial downturn has taught small businesses that those supersmart Ivy League guys on Wall Street, in corporate boardrooms, and in Washington policy think tanks still don’t have a clue.

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Silly Myth #7: The government can stimulate the economy and create jobs.

We don’t believe that either. We’ve seen the Fed ease money and keep interest rates at near zero over the past few years. We’ve watched our President spend trillions on stimulus and tax incentives. We’ve let cats run our towns. And all we’ve got to show for it is an anemic 2% growth rate and a couple of new democracies in the Middle East. Big whoop. Don’t misinterpret me — governments can help get the ball rolling. The Marshall Plan began an economic recovery after World War II. Johnson’s Great Society (not to mention the Vietnam War) helped spur growth. Reagan’s defense buildup in the wake of Soviet aggression was one part of his economic recovery. A stable tax system and well-managed Federal Reserve is critical. But the government can only do so much. Merger-and-acquisition activity was a big part of the stock market explosion during Reagan’s administration. A dot-com boom fueled the economy under Clinton. A housing surge helped Bush. A lot of things could happen that would make our next President seem like an economic genius. So small-business owners don’t look to the government for answers. We try to avoid dealing with the government whenever possible.

I hope this clears up a few myths about us. Now, if you don’t mind, I have some work to do. I’ve got exactly 990,592 new jobs to start creating, and that’s not going to happen overnight!

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27 comments
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ripple79
ripple79

Myth #7 is WRONG.... Trillions on stimulus?  The ARRA was just $800 million or so, and 40% of that was misdirected toward relatively ineffectual  temporary tax cuts.   Nevertheless, when real (inflation adjusted) federal spending rose (mid-2009 to mid 2010), overall employment grew relatively rapidly.  Since then as real federal and, especially state and local government, spending has fallen (check the data), employment growth has been anemic.  The economy is well below potential activity and we are in a liquidity trap and so monetary policy is ineffective.  Long past time -- and maybe too late -- to roll out real fiscal stimulus.

brianleesblog
brianleesblog

#7 does not report that U.S. immigration policy is responsible for more than three-quarters of that population growth. Part of that policy is granting an average 75,000 permanent work permits to foreign workers every month.

jeru0455
jeru0455

Government investment has helped to spur the growth of the solar panel industry which has it's cost per product dropping by almost 30% per year right now. That is the best way for the government to spur the economy.

Fatesrider
Fatesrider

I don't think a lot of people understand the scale of the problem. Yes, the impact COULD be large if each business used that 5 grand, but each business operates independently. They don't POOL that money. And it's absolutely true that a business WILL NOT HIRE ANYONE UNLESS THERE IS A NEED FOR THEM. EVER. PERIOD.

It's ludicrous to think they'll do that because it's a capital expense for a business. Five grand does NOTHING to offset that cost, and no one is going to be willing to work for a measly five grand a year. If you add in the accounting costs, the paperwork, the training and other impacts on the bottom line, that 5 grand disappears within the first few months if it lasts that long. And if there's no demand for that worker to be hired, that worker's wages come out of the bottom line - possibly imperiling the solvency of the company. Most small businesses don't have large cash reserves for bad times.

This is why people are laid off.

There is only one - ONE - thing that will get businesses to hire more people - DEMAND.

The ONLY thing that creates that demand is people spending money for the goods and services provided by that businesses.

So if people want to see demand rise without misguided and ultimately futile efforts to stimulate hiring by giving tax breaks to businesses, it's very easy to see how a very different - and radical - shift in the tax structure could do that. Shift the tax burden to the wealthy. They can afford it. That puts money into the pockets of hundreds of millions of people who are willing to spend it. That's not a "small number" by any stretch of the imagination. That's a hell of a lot of money flowing into the economy from a hell of a lot of people in a hell of a lot of places. Put a thousand dollars each into a hundred million people's pockets and you have HUNDREDS of BILLIONS of dollars going into the economy.

And yes, the wealthy can afford to take on that burden. They control more than 135 trillion dollars in the U.S. alone. Their burden would amount to less than 1% of this amount. If you pump an additional trillion dollars into the economy each year by way of a PERMANENT tax restructuring (as opposed to a one-time "stimulus" which just went to pay down debt - going back to the wealthy in so doing - or being saved - which also went to the wealthy), people will SPEND IT.

The wealthy DO spend quite a bit of money, too, but their spending is too focused. There aren't enough of them spending enough money in enough places to do the job. And even if they tried, they wouldn't, and couldn't, sustain it. But they're the ones with the money needed to stimulate demand.

If all taxes were cut to zero on all people below about twice poverty level and raised on the top earners to about 40% (including capital gains) and scaled between the extremes, you'd see the economy recover within six months. And the wealthy would then more than make up for what they lost because that money will be flowing back to them again.

That's part of the idea of wanting to see that 5 grand SPENT. But there aren't enough small businesses to do that with a measly 5 grand each. It's just not ENOUGH to do the job. Give it to the people who spend money and the economy will recover.

padgettshcom
padgettshcom

While everyone can pick apart this myth or that myth, I think the important thing to take away is that you're saying nothing's nearly as bad (or good) as they say it is. A little tempered optimism, and even a little tempered pessimism, isn't a bad thing. 

][
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Nope, far from being the popular person.  Overly entitled, definitely - no matter how much "hard work" you claim to yourself.   You're also as stable as that nuclear reactor in Fukushima, Japan - just one step away from uncontrolled disaster  - as a small business.

Some of you have decided to sabotage the country through politically-driven HR practices.  As a result, plenty of people have suffered for your arrogance.  You are lucky that the country has not taken the proper course of action to restore prosperity - at the cost of snapping the will of the few who insist on sabotage over prosperity.

In addition, your claims to uncertainty are ringing hollow.  It may have been fine for a few months, but not for as long as 4 years.  That excuse is much like a rabid dog - either put it down or it will get put down.

johngray0
johngray0

Silly Myth #2: More taxes on the wealthy will significantly hurt the economy.

a. A bit of a strawman.  Sort of like saying a little cookie won't hurt a fat slob, but that's not the point.  The argument is really about direction than about magnitude.  Combined tax hit (fed+state+local+property+cap gains+corporate+hidden tax of regs+obamacare on deck) is already high in absolute terms and relative to other countries we compete against.  So forget about the cookie (i.e. small tax increase) and start looking to put big belly bloated government on a crash diet.

b. Ignores risk.  Very common to leftists who are overrepresented in academia, government, or the trust fund crowd all for whom the concept of risk is as real as jabba the hut.  The author make a point that higher taxes won't change much for those who already have large cash flows going.  He ignores that to get there those same people had to make investments in capital, often leave a stable job, suffer lifestyle quality.  We are not starting from a baseline of zero taxes, so people who are thinking of risking their small nestegg (you know, the ones that will replace the millions of lost jobs) and years of their life are already asking if it's worth it.  Does a message that you can pay "just a little more" before you even have it make you want to take such risk?

c. Flat out annoying.  Don't care if lefists are asking for just 1 penny more.  Like the friend who always hits the restroom when the check comes, you don't feel like spotting the deadbeat another round even if he's just asking for the cheap brew.  Lefist government has been very well fed for decades, far beyond what was originally called for and what is to show for it?  

Starshiprarity
Starshiprarity

I like this article but I must at least slightly contest the idea on stimulus. On a small scale, it can be effective- its like when the government invests in a company, but untargetted fund splurges cancel themselves out. But stimulus to individual tax payers could help create jobs. Instead of giving a company $10,000, give $500 to 20 people. Each of these people will use those funds to pay off bills or treat themselves. Either way, they now have access to funds that they did not budget for which will innevitably be used to pay someone else for something. The demand creates jobs which creates workers which create demand.

c_laird478
c_laird478

#2 has a problem because it only takes into account earned income.

A lot of the more wealthy receive much of their income from their investments. And because of the Bush tax cuts, much of that income is taxed at only 15% max (cap gains and dividends for stocks held at least 1 year). Add to that that much of investment income is from things like munis that are even totally tax exempt. Add to that that even on earned income, SS tax only applies to the first $100,000 or so. All of their earned income above that limit is totally exempt from SS tax.When you add all of these factors together it is easier to see why Warren Buffett has said that he pays a significantly lower rate of taxes on his income than his secretary who makes considerably less than he does.

vstillwell
vstillwell

Actually, the tax hoopla regarding small business is a hoot. If you want to see someone sweat, become an IRS auditor and audit a small business' inventory. That's always a good one. In fact, many CPAs just call up their clients after their returns are almost completed and hash something out. Now I know some self righteous business owner will call me out on this, but it's the truth. In fact, I've seen many businesses just make up an entire year's worth sales and expenses. The hunting trips to Russia written off as business trips was comical. Classifying employees as contract labor so they don't have to mess with payroll taxes is always maddening, especially when you consider how simple payroll taxes are and how little they actually cost. 

Small business owners are just like everyone else. Some are good to people and some aren't. I've seen some drop their employee's retirement and health plans citing the economic conditions when in fact they just took advantage of them. It's not like their workers were going to quit and find another job. Not in this economy. I've seen a few business owners do right by their people and sacrifice right along with them. 

worth_every_cent
worth_every_cent

Several posts here about Myth #2 miss the point as wide as the contributor, Mr Marks. Significant jobs do not come about because the owner adds another check-out lane and hires a cashier or two.  Jobs come about because the dry cleaner opens a new location, the software start-up expands into another development effort, the distributor decides to add another product line, the service franchisee decides to submit a proposal to a client twice the size of their biggest existing client, or a small manufacturer decides to accept international orders.

These are not foolproof plans, and they can't be undone with a lay-off or two.  There is a real chance of losing money. The upside must justify the risk, and higher taxes means investments must involve lower risk, since there is less upside to compensate. If investments require a lower risk then businesses develop more conservative plans, which means less people hired.

Everything is about the plan the plan the plan.  Small businesses are less sensitive to tax rates than to tax uncertainty. If they can plan around it, they will. So a tax proposal, like a tax cut, doesn't always have a uniform impact.  Still, even a seemingly small 5% can prove enough to throw the plan's success into doubt or delay. So much for hiring this quarter!

valente347
valente347

I have two problems with myth #3.

First, I don't know that you'll ever convince families that make less than $100,000/year that $250,000 isn't wealthy (to say nothing of the millions of people in the US who make it on food stamps and minimum wage). I just turned 26, and my family never, ever took home more than that a year, even though they eventually owned their own business. Two of my 3 brothers went to a private high school, and my sister and I went to private school our whole lives till college. We had a nice home in an old neighborhood that was big enough for the seven of us. We went on modest vacations, staying with relatives and such. We had nice Christmases. I took cello and piano lessons, and played soccer and volleyball. We had health insurance. My parents drove reasonable cars. When I went to college, my parents' business tanked so much that I qualified for full Pell Grant assistance some years, but we still never felt deprived. I think that this is because my parents spent their money so it would go a long way. Perhaps the author lives in a very expensive part of the country, but as the majority of people in the US do not pay the housing prices of San Francisco or Long Island, $250,000 goes a long way. 

Second, in defending themselves, business owners (small or otherwise) feel the need to point out the stress, responsibilities, hard work, and time they invest in a business. The thing is, business owners do not monopolize those hardships, and conflating them with money (or other economic rewards) devalues the work all of the people who live lives just as frantically outside the business world. People may not invest time solely in a job, but in volunteer work or caring for children and/or sick family members. Those activities can be just as demanding, and they are a great benefit to society. Of course, there are also people who do put 80 hours a week into their work, but will never receive such high monetary compensation. The very best nurses work grueling hours in high stress jobs, but their earned income alone will never make it past the $250,000 mark this year. Even a colonel with 30 years experience in the US Army won't receive salary and benefits equal to $250,000, but you can bet that rank comes with some stress and responsibility. (People working for minimum wage tend to have it pretty hard as well...) So, to make it clear - if you put in 14 hour days, $250,000 a year is a lot of money for that effort. Many, many people put in 14 hours a day (either in a paid job alone, or combined paid/unpaid work) and receive far, far less. As you climb higher, you can better see the incredible wealth of millionaires and billionaires, but that doesn't mean you aren't vastly wealthier than the majority of Americans.

Lazy_I
Lazy_I

 That was a good post. I would just like to add, however, that a small business owner working 14 hour days to make his $250,000/year can just as well have the same outside, non-paying responsibilities, service, and concerns as those that make less and work fewer hours at their job.

I know several individuals who work 60-80 hour weeks, make a good income, but also care for sick parents, serve in their church and community for several hours a week, have children, and don't get paid anything for those hours. Non-paid good works and concerns aren't unique to non-business owners.

valente347
valente347

Of course hard working business owners can have stressful family responsibilities as well! But especially when one has a role as a care-taker, the hours put in seem only seem to be limited by the person's spare time. There are only so many hours in a week. If someone is putting in 80 hour work weeks, that leaves just 88 hours for every other activity. A person who dedicates 60-80 hours per week to their business can certainly spend the rest of their free time doing non-paid work, but they probably won't be able to put in the hours that a person with an average workload will, even if they wanted to. 

My point is that many people can work themselves to the bone in paid or unpaid work, and that unpaid work is very valuable. However, one should understand when receiving $250,000 for a year for combined paid/unpaid work that they are extremely well compensated for said effort.

TucsonTerpFan
TucsonTerpFan

Good read, and thanks for your input, made without vitriol or rancor.

F. Lynx Pardinus
F. Lynx Pardinus

 Regarding Myth #3, >=$250k in income puts you in the top 2% or so of American income. If you make more money per year than 98% of Americans, and don't consider yourself "wealthy," then I'm not sure the word "wealthy" has any real meaning anymore.

vstillwell
vstillwell

Well, see, you make some people mad when you support a slight tax increase. Heaven forbid someone with a higher income contribute a few percentage points more towards their country that they profess deep love and affection for. It's easy to rap yourself in a flag and say how much you love America. It's another to actually sacrifice something for it. It's galling that at this point in history, when so few have so much and the economy is still in shambles, that they flat refuse to sacrifice a small amount of their income to taxes. It's even worse when you consider all the freebies and low interest loans local and state governments make to businesses these days.

You hit on a good point. Some business owners gripe incessantly about paying payroll taxes. The problem with that argument is that it's part of the employee's pay package. You always factor in all the costs for an employee, including the taxes. In essence, those taxes come out of the employee's pocket, not the businesses, unless you think employees are just a necessary evil, which seems to be the mindset of so many businesses these days. 

Andrew Witkowski
Andrew Witkowski

So you are suggesting that the 50% of Americans who pay no income tax should contribute?

valente347
valente347

What's sad about that statistic is that we have such a large percentage of Americans who live on so little (with the exception of people who live very well on unearned income).

However, even if a person makes so little money that they don't owe any income taxes, they still pay taxes in the form of sales tax (and perhaps property tax), for bus, subway, and toll fares, and for other government services. These taxes and fees usually regressively affect lower incomes. And unlike the income of wealthier people, almost all of the income of poor people goes right back into the economy. I'm going to guess most retailers don't mind the subsidy.

dmbfan93933
dmbfan93933

I'm afraid Silly Myth #5 is part of the problem.  Section 179 deductions have increased rapidly over the last few years and are now at a maximum $500,000 deduction allowed (with certain limitations, such as a taxpayer cannot use section 179 to put themselves in loss position).

Depreciation on assets is usually spread over the useful life of  assets as they are being used to generate income.   If a taxpayer uses Section 179 he will lower the present year income, but none of that expense will be available in future years to offset income.  

Businesses that have taken advantage of this "tax break" are going to fight like heck against further tax rate increases because they are picking up income that was deferred from prior years and now they do not have depreciation expense to offset revenue.

I've been watching this going on for years now and it worries me.

Frederick Antoine
Frederick Antoine

"Myth #2 "is based on an assumption that the theoretical guy who pays a extra $5,000 in taxes would have spent the money on a vacation, roof repairs, a diamond necklace for his wife, an upgrade to his accounting software, or a new car -- these are mostly luxury goods. A truly gullible person may believe that is where "extra income" (if there is such a thing) goes. This is a clear fallacy, and it is incorrect in more ways than one. First, although it is unlikely that $5,000 will go to creating a new job within the guy's company it may be spent on new equipment, investments, or supplies that are crucial to help maintain a new business, invest in new sectors of a company, create future employment in new sectors, and pay off loans. The money may even go to hiring interns which provides training an future employment to younger generations. By taking that money, you may have just made it more difficult for a college student to land an internship, or for the company to develop a new product.  You can't just take money from somewhere and expect complete equilibrium. Of course; however, if you make the assumption that the money is going to eating caviar or taking weekend trips around the coast of Venice, then you are absolutely correct about a tax increase probably not hurting the economy. (You would have to avoid a few economic principles along the way in this assumption, but all in all you would be correct.)

Nicholas Mapes
Nicholas Mapes

 I think you will find that most corporations will just sit on the money.  "Corporate Cash" has grown to to record levels.  After that the investor are all ways looking for a boost in dividends, and lastly it is much easier to hand money to the buddies you see everyday rather some worker in your corporation who you most likely never meet regardless of the fact that they are working for a wage that hasn't been competivtive since the 80's.  The point of all this is that workers are at the back of the line when it comes to raises. 

chip4761
chip4761

Any and all examples you gave are moot, as reinvesting money into the company is not part of net profits, and is therefore not taxed. I'm surprised that wasn't a myth listed above. 

Myth #8

Small business owners who NET $250,000 of profit would like you to believe having a small percentage less will somehow inhibit their growth. In fact, investing in machinery, new employees, systems, services, etc. would make their tax burden DECREASE, but instead they want everyone to believe this isn't the case. 

I'm sorry you make a QUARTER of a MILLION DOLLARS in profit each year, and that's somehow not enough to live on. And if that's what your netting, what the heck is your gross? I suppose it would depend on the biz, but if an individual or family is bringing that home, how can they not spare some to help out the economy they rely on to survive? 

bcfred
bcfred

Funny and true, but I actually take exception to Myth #2 - that taxes don't affect behavior.  The author is right that the example business owner making $350k won't hire or fire based on a $5k swing, but when you look at the impact across millions of businesses there is an undeniable impact.  It's the decision to add that marginal job, multiplied across vast numbers of individual decision-makers, that quickly adds up to meaningful figures.  When we're talking about the economy only adding 100,000 in a month even seemingly small numbers can move the needle.

Anthony Helfenstine
Anthony Helfenstine

More taxes on the wealthy will significantly hurt the economy....Is not a myth..they have had taxes break for the last 8 years and have spent or hired more people...looks to me..like there hoarding all there moneyRead more: http://business.time.com/2012/...