I spoke with a fellow machinery shop owner the other day who said he’d fired four people--bringing his total staff to 47--in order to sink below the 50-employee mark that triggers penalties under the Affordable Care Act.

At the same time, my defense sector customers have slowed their ordering due to fears about the possible impact of sequestration--the automatic cuts in defense and other programs that would take effect next year if President Obama and Congress can’t negotiate a budget deal and we go over the fiscal cliff.

Such is the new normal for small businesses. Even as lawmakers harp on the importance of small business, those of us in the trenches are scrambling for ways to manage the uncertainty. The scramble is reverberating in ways quite opposite of what policymakers intended. Namely: lower business confidence, which translates into reduced spending and staff reductions.

All this “bad karma” is arriving at an especially inopportune time, as many companies assemble their budgets for the coming year based on their best available outlook.

No Robots for Me

The standoff in Washington has felt like watching a train wreck in slow motion. We expect this cliff will be averted, but because we can’t tell for certain--and neither can anyone else--we don’t know the potential impact on the economy.

There are elements of Obamacare that are good, but those four people out of a job at the machinery shop probably aren’t pleased with it. Another business owner I spoke with, this one in the food sector, is planning to reduce some employee hours to 28 per week from 35 to get below the 30-hour threshold of the act.
All of the uncertainty makes us squeamish about whether to proceed with the purchase of two robots, at a cost of about $1 million, for our sheet metal and wire products plant. Those machines will improve my factory’s precision, its ability to win more jobs, and its capacity to hire more workers. (Remember how the candidates stressed jobs during the campaign?) But that sizable purchase is inextricably linked to how many more orders we can win, which is intrinsically tied to overall confidence in the economy.

Small businesses aren't the only ones reacting. Large companies are frontloading huge dividend payments to shareholders before the end of 2012, in order to get ahead of coming tax law changes. Public corporate filings will show those dividend surges, but the examples of a small business trimming staff to avoid the health care law won’t be so easily revealed. The point is that companies large and small are run by smart people and, like it or not, they’re going to seek and find ways to game the system.

Missing the Point

All this year-end volatility obscures and impedes the main issue, which remains job growth and private sector health. Simply put, we have to grow the pie. More jobs mean more revenue to the public treasury, which means a greater ability to afford social programs and balance the budget. The increase in taxes is the wrong approach. Sure, it’s easy to lampoon some guy with a cigar and a martini on South Beach as the foil for raising taxes on the top two percent, but the issue is more complex than that. Many small businesses, like mine, pay their corporate taxes as personal income taxes, so they will be directly affected by an income tax increase. If Uncle Sam raises my income tax rate, I have less to put back into growing my business. That’s not good.

And I am not alone. About half of non-farm private sector workers in the U.S. work for small business, according to the Small Business Administration, and about half of those workers are in companies our size -- between 10 and 100 people. And more taxes for those small businesses means less capital available to hire new talent, to launch a marketing campaign, or to buy that robot.

These actions resonate across the entire economy.