A New Tack For The New Year
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
To complement the jobs tax credit, a training tax credit should be linked, perhaps, to the newly enacted $3 billion Job Training Partnership Act of 1982. In a recent study, Northeast-Midwest Institute estimated that 1.8 million to 2.1 million of today's unemployed have been technologically displaced. They are not likely to be reemployed doing what they did before. We have a limited amount of time to solve this problem, which affects every sector of the economy.
Another provision of a small business recovery act should cut in half the federal tax on capital gains that result from investment in small businesses. Investors would benefit from this provision only if they had their money at work in the small company for more than three years. A model for this type of legislation is now on the books in California; a parallel federal measure would help small businesses nationwide attract equity capital. Those who consider this kind of measure to be undue favoritism have forgotten the different levels of risk involved in investing in small and large businesses.
Still another way to expand the flow of cash to small companies would be to offer to investors a "participating debenture." As the law stands, a company that borrows money can deduct only the interest it pays on the loan. Now, if it chooses to pay a lender a combination of interest and share of profits, only the interest portion is deductible. Changing the law to allow the borrower to deduct the share of profits as well would help the smallest companies that don't have attractive equity or that simply do not want to give it up.
Whatever specific provisions the bill includes and whatever their precise form, we must not lose sight of the basic reason for making small business an integral part tor any national job-making strategy. In their AICPA paper, Swain and Guttman cite a forthcoming SBA study that points to one solid rationale. The study establishes that "small businesses provide twothirds of all initial work experience and training opportunities. Specifically, 67% of all male workers get their first steady job in firms with fewer than 100 workers." And, from 1979 to 1981, Fortune 500 companies reduced employment by 600,000.
Suppose a measure like SBERTA were accompanied by a strong push toward ending government competition with small business (see INC., July 1982, page 124). That would serve as another green light to that part of the private sector most likely to make jobs quickly. It would say to business that government really means to be the employer of last, not first, resort.
"Well," you say, "a bill like SBERTA might have real value. But why of all things create a National Commission on the Global Economy? Who needs one more dust-catching report?"
We all need a report on worlcl economic conditions -- a report that must be studied and utilized. We have now had a global recession for nearly seven years. I have asked every economist, business leader, and government official I have met during the last year to tell me what precipitated this worldwide slump. Without exception, they shake their heads ruefully. "Productivity went down," says one. "Inflation," says another. "OPEC and oil prices," suggests a third. But they all concede that they are not satisfied with what they have read and heard. I suggest that the world's latest revolutions in technology may be making all our major economic theories obsolete -- none are adequate, not the Marxist, Keynesian, classicist, neoclassicist, or supply-side.
In The New York Times, the morning after the November elections, James Reston put it this way: People are out of work in the Unit ed States, businesses are failing at a record rate, not primarily because Ronald Reagan loves the rich and hates the poor -- though he some times forgets the difference -- but because the world is changing fast er than we can change ourselves or our political institutions.
Few Americans even know that the recession we are experiencing is worldwide. Yet they know in their bones that what Mr. Reston says is true, that the aches and pains of our own economy are tied up with what is happening elsewhere. And they know that rapid change has shaken our most fundamental economic assumptions. What worries them most, perhaps, is the fear that, even if their leaders know more than they, they still don't know enough to cope with the present crisis.
Making decisions without seeing the whole picture means frequent missteps. Sometimes, for instance, the changed global economy means that ostensibly sensible policies have unpredictable, damaging side effects. In 1982, for example, the Federal Reserve Board took a number of steps to strengthen the dollar against other currencies. Doing this however, also made our export goods more costly and less attractive to other countries' consumers and foreign goods more attractive to Americans. As a result, at press time, Treasury Department officials were predicting that 1982 would end with the biggest trade deficit in our nation's history.
A comprehensive study of the world economy could clearly lay out the consequences of different policies. At the very least it would sharpen the focus on what has already occurred and throw light on the policy alternatives we have available.
The impulse to do a thorough study is not a new one. It is just two years, for example, since Richard Bolling, former representative from Missouri, persuaded the Joint Economic Committee to prepare and publish 10 volumes of papers as a "Special Study of Economic Change."
But how many members of the Senate and the House have had a chance to look through these volumes? A high-level national commission could certainly use these collected papers as a starting point, perhaps summarizing them in one volume. However it goes about its study, a commission must find answers about where we have been heading and how we got there. Only then can we begin to know where we must go.
It may make sense for the 98th Congress to spend dollars on public works and other job-creating measures. But the amount of money it allocates or doesn't allocate will not be the best measure of its success. If it tries, however, to go down in history as the "thoughtful Congress" -- one that put in place a viable plan for the present, while prudently planning for the future -- it will be doing what I believe the American people want.