Blog: President’s economic plan offers no real incentives to small businesses

Steve Jackson

Elephant in the Room
with Steve Jackson

President Barack Obama addressed the nation this morning on his plans for America’s economic future. He went by the party line, claiming that he was addressing 10 years of bad policy (during part of which he was a senator) and that no one knew how long it would take to climb out of the recession.

The President attacked Republicans for blocking a huge jobs bill aimed at providing a pool for loans to small business to use for hiring and job creation. He also noted (a very minor part of his speech) that he may look at extending the tax cuts for the middle class, apparently forgetting his previous claims that the Bush tax cuts only helped the wealthy.

To address his claims that a $30 billion dollar loan incentive, intended for banks to use for lending, and some $12 billion in tax cuts over the next 10 years will prove successful, I’ll provide a simple explanation.

Let’s take a theoretical example for a small business and call the owner “Suzy somebody.” Suzy somebody owns a small business with income that puts her in the top bracket at $250,000, but she only allocates $100,000 to herself. The rest of the money she reinvests through expansion, bonuses, new equipment, or a renovation in her office. During the recession, Suzy has been able to stay afloat but fears hiring new workers and may have had to lay off workers to decrease costs to stick to her business plan.

Suzy looks forward to the end of the recession. She plans to open another store and to hire workers in another location. She looks at real estate and sees low costs, wondering about the best way to take advantage of prices and looking forward to the time when increased consumption will give her the opportunity.

Then, she sees the healthcare bill pass and looks at the reality of a tax increase at the end of the year when the Bush tax cuts expire.

She has not paid for healthcare for her workers who don’t work 20 hours and has had trouble keeping costs down for the workers she has paid for.

As the healthcare bill’s effects begin to take hold, she faces some choices: She can 1) pay for healthcare for all of her employees and reduce the amount of money she has to reinvest or for new hires,  2) drop healthcare for all of the employees and pay the lower cost “fee” or tax to reduce the bill’s impact, or 3) pay healthcare for some of her employees, pay a fee for others, and reduce hiring or fire employees who may not be as competitive.

All of the choices cost more than she would have been paying before because of the fees for employees who haven’t been receiving healthcare plans. Employees who have healthcare benefits will most likely lose them or see them reduced. That is unless Suzy does not expand, reduces hiring, or fires employees.

The first choice means that she will reduce hiring and may not be able to pay for that expansion—money that could have been used to stimulate the economy and possibly help the unemployment situation.

The second (and most likely) choice costs more than before the bill but is less than the first option and leaves her some money for reinvestment. Unfortunately, it puts her employees in the predicament of finding healthcare, which will most likely be of less quality than what they had before.

The third choice has the same effect as the first but may cost a little less. Her employees will not be in in a better situation than before the bill was passed and may face a job loss as the business responds to increased costs.

According to the Small Business Administration, there were 29.6 million small businesses in the United States in 2008. Let’s say, theoretically, that number declined to 25 million small businesses. Obama’s small business loan plan of $30 billion would open up $1,200 dollars per small business to reinvest (which are loans that have to be paid back), a drop in the bucket. The $12 billion in tax breaks over 10 years would equal $480 dollars per business; if taken over 10 years that would equal $48 dollars a year for each business.

Now, do you think that Suzy somebody would benefit from the bill? Do you think that she would take a loan when she’s already looking at a healthcare cost increase and the expiration of the tax cuts? What motivation would she have? Even in the short-term, how much is $30 billion in loans and $12 billion in tax cuts over 10 years going to help small business? If you wanted to expand your business, would you rather the tax brackets stay the same? Or would you rather the cuts expire and have the opportunity to expand by increasing your debt?