Small business is a big deal—not just for the economy, but for any politician hoping to get elected.
So it’s not surprising that Hillary Clinton, the Democratic frontrunner for the 2016 presidential election, has declared that she intends to be the “small business president.” Expect the same, more or less, from every other candidate who makes the ballot.
Clinton has identified a vital economic priority. Businesses with fewer than 500 workers account for half of all private-sector jobs and 64% of newly created jobs, yet Americans are losing their entrepreneurial spirit. The supposedly dynamic U.S. economy ranks 12th among developed nations in entrepreneurship, behind formerly communist Hungary, marginally socialist Sweden, and old-Europe Italy, according to Gallup. And the pace of new-business creation has slowed sharply in recent years, as this chart from a 2014 Brookings Institution study shows:
Source: Brookings Institution
Clinton has a four-point blueprint for how to revitalize small business, which includes slashing regulations, expanding access to capital, cutting taxes on new businesses and improving their access to national and international markets. (And she posted it on LinkedIn, an entrepreneurial social media site popular among entrepreneurs.) But every politician says basically the same thing, and not much changes. Here’s what business owners say Clinton would really have to do if she wants to spur a small-business renaissance:
Declare war on the federal bureaucracy. Virtually every president— including President Obama—promises to cut regulations on small business, a pledge business owners applaud. "Get out of the business's way," says Gunjan Doshi, CEO of InRhythm, a technology consulting firm in New York City. "Most small businesses want to focus on running the business. Regulations are a distraction."
Here’s the problem: There are dozens of federal agencies that regulate business and no single edict from the White House will ever change the nitpicky culture at all of them. What might is a concerted effort, with Congressional support, to consolidate agencies, shred millions of pages of outdated rules and streamline the government’s vast regulatory apparatus, the way a private-sector goliath would reform and shrink itself in a crisis. Easy to say; in reality, unprecedented.
Call out business-unfriendly states and cities. The real problem for business is often an overlapping thicket of rules at the federal, state and local level. “The cumulative weight of regulation is probably the most important impediment to starting a business,” says economist Bob Litan of Brookings. “Large, mature firms have the resources to handle those. Startups might not even have a lawyer.” Washington could create incentives by offering municipalities grants for boosting business creation, and finding other ways to identify overlapping rules that need the most attention.
Stiffen consumer, worker and environmental protections. Liberals often oppose streamlining regulations because they suspect it’s a sop to big business at the expense of consumers, employees and the environment. Yet it’s possible to cut meaningless red tape while also clarifying the red lines that might trigger fines or prosecution, and even increasing the penalties for violators. Spurring business at any level requires this kind of bipartisan compromise.
Let more immigrants in. Immigrants start businesses at a higher rate than native-born Americans, which is unambiguously good for the economy. The breakdown in Washington over immigration reform is largely due to the conflation of illegal immigrants — a genuine problem — with newcomers who arrive in America legally, contribute to the real (not underground) economy, and pay taxes. A new president willing to commit political capital and deal with the political heat might break this logjam.
Smooth out tax rates for small businesses. This, again, is a federal-state problem that can’t be completely solved by Washington, but some small businesses pay much higher tax rates than big corporations because they can’t take advantage of complex international tax strategies the way multinationals can. “In California, where we are, our profits are taxed at the maximum personal rate of approximately 52%, state and federal combined,” says Mike Patton, CEO of DSB+, a Bay Area floor-finishing firm. For the typical big firm, by contrast, the effective tax rate in all jurisdictions combined is less than 20%. That gap ought to be much smaller.
Stop bashing big business. President Obama may have won populist points by trash-talking Wall Street CEOs, but big businesses may be less comfortable spending when they sense the government is out to get them. "Anti-business rhetoric causes Wall Street to hoard cash instead of investing in the Main Street economy," says Jim Blasingame, host of the radio show Small Business Advocate and author of The Age of the Customer. "Big businesses are our customers." In that regard, corporate tax reform aimed at big businesses would also help smaller firms, if it lowered tax rates, made the tax code more equitable and lured more foreign firms to the United States.
Tackle the soaring federal debt. It will take years to revamp entitlements, fix the tax code and arrest the growth of the $18 trillion national debt. But meaningful progress would cheer small-business owners and give them a reason to invest more. “What creates uncertainty is the looming clouds of pensions, entitlements and health costs," says Gene Marks, president of the Marks Group, a 10-person consulting firm in Philadelphia. "They terrify most people I know who run companies and are afraid to invest long term for want of conserving cash.” If Clinton can sow optimism among small-business owners—who are programmed to anticipate what might go wrong—the rest of America will likely follow.
