A New Tack For The New Year

Two proposed bills -- one to create jobs for small business at home, another to study the worldwide economic slump -- might provide the solution voters seek.

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What window of legislative opportunity, if any, will there be in the 98th Congress for small businesspeople and entrepreneurs? A reasonably good one, I think, if our representatives in Washington read the 1982 election results correctly.

In a pre-election editorial, The Economist suggested that the best election result would be "a cautionary tap on the shoulder" to the Reagan Administration The final tallies suggested considerably more than a tap but not quite a knockout punch. The Democrats picked up 26 new house seats, seven governorships, and 11 state legislative houses. What brought people to the polls in the first increase in off-year voting in quite some time was, according to pollsters, concern about jobs. The President did succeed by a thin margin in denying the Democrats a landslide. A shift of fewer than 50,000 votes in five states would have turned the Senate over to the Democrats. But the election of five moderate Republicans in those states -- people like John C. Danforth of Missouri and John H. Chafee of Rhode Island -- was a sign that the public wasn't enthusiastic about big-spendirig Democrats either.

Those elected to the Senate or the House will do well to heed the voters' message -- more jobs without profligate spending. The public demands an end to double-digit inflation and double-digit unemployment. In short, our newly elected officials are charged with finding innovative and effective ways to avoid both. If I were one of those officials, item one on my agenda would be a "Small Business Employment Recovery Tax Act" (let's call it SBERTA). Such an act would encourage the creation of permanent jobs in the most labor-intensive part of the private sector. Item two on my list would be the creation of a "National Commission on the New Global Economy." This commission would seek to explain definitively the relationship between the global recession of the last five to seven years and our own present predicament. Armed with this knowledge, we could at last make informed and intelligent policies for the future.

Small businesspeople and their financial supporters will set the pace for economic recovery. But the new Congress can help to speed or slow it.

How wisely Congress draws on the ability of small businesses and entrepreneurs to create jobs will tell part of the tale. How thoughtfully Congress faces our long-term problems will tell the rest.

The two modest proposals I suggest would meet the first requirement for times like these: They are not likely to do any harm, and there is a reasonable chance that they will do some good. They also meet a second critical requirement: They are politically possible. Democrats and Republicans cari find common ground here, despite their inevitable hair-pulling and posturing. Of course there will be plenty of controversy, but some version of these proposals would stand a good chance of passing both houses.

A Small Business Employment Recovery Tax Act would provide the biggest job-creating bang for the smallest deficitdeepening buck. The act would encompass a number of proposals that have been debated for some time. Its centerpiece would be some form of general jobs tax credit, that is, an incentive bonus that the government gives a business when it employs more people in one calendar year than it had employed for some stated period, generally the previous year.

Everything about the jobs tax credit is controversial among economists and tax specialists. Some oppose it on principle. To these people, taxes should be used only to increase revenue; any use or tax incentives is, in their view, wrong. Others simply do not think it will work -- employers, these opponents argue, will not be moved to hire people just to obtain a small tax break. Still others believe that direct government expenditure for public works programs is faster and better.

In 1977, a general jobs tax credit was enacted by Congress over the objection of the Treasury Department. In less than two years, it was off the books. As a substitute, a credit targeted for the "hard to hire" was enacted. In a paper prepared for the American Institute of Certified Public Accountants' Small Business Tax Equity Conference, Marvin Dickman, a tax accountant with Arthur Andersen & Co., tells why these previous credits failed. First, he argues, employers did not know about them. Second, their provisions were too complicated to permit easy cornpliance, while the incentives were not large enough to induce employers to alter hiring patterns. Finally, businesspeople were reluctant to become involved with governmental red tape and audits. Although Dickman doesn't report this fact, it turns out that, despite the unfavorable conditions of the 1977 experiment, the credit did have a slight, positive effect. A study sponsored by the Department of Labor found that employers who had heard about it were 3.4% more likely to hire than employers who hadn't.

In two other AICPA conference papers, Professor Robert Eisner of Northwestern University and two Small Business Administration officials, Frank Swain, chief councel for advocacy, and George Guttman, a staff tax specialist, agree on two crucial points, although their specific proposals differ. The three argue that a sustained experiment is worth undertaking. They also think that any future credits should apply to payroll, rather than income, taxes. If a company has no net income, they point out, an income tax credit does it no good whatsoever. All employers, however, pay payroll taxes, whether or not they show a profit. Tied to payroll, the credit would be much more attractive to the newest and smallest companies. They are the ones that need the incentive most, that want to hire, and that frequently don't have enough cash flow to do it.

It is crucial that we try the jobs tax credit for a full 5 to 10 years to find out if it can really work. It takes that long for a fair test. Small businesspeople need time to see what it means and how to use it. Government people need to see how it operates under varying economic circumstances. Will it, in fact, help level out the highs and lows in the economy? How much will it cost, and how much new employment will it generate? Will the new jobs be permanent? Only by using it in good times and bad can we find out

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