Helping small businesses: from the dull to the dangerous

Douglas Holtz-Eakin Former Director, CBO
Font Size:

President Obama today signed into law the Small Business Jobs Act, a moment that does not constitute either much action or any real hope for jobs.  Let’s review what’s on the table.  First, there is the “mini-TARP” — a $30 billion infusion to community banks — and expansions of the Small Business Administration lending programs.  There is no panacea for small business lending woes, so nothing the government does will matter much.  This includes a fund for lenders, who will likely be terrified to touch taxpayer money lest they fall into the Treasury regulatory maw, and anything that builds on the SBA’s checkered history.

In addition there are eight “tax cuts,” as the White House describes them — all nickel and dime affairs reminiscent of the Clinton-era “small ball” approach to tax policy.  The bill would drop taxation of 25 percent of a narrow category of small business capital gains, increases the limit on expensing of capital investment by small businesses, and extends to the end of 2010 the stimulus provision that allowed 50 percent expensing by all firms during 2009.  These are pro-growth, but won’t amount to much.  The first affects few firms and investments, while the marginal effects of the later two are limited to slightly bigger investments for small firms, and only investments undertaken in the 4th quarter of 2010 for all firms.

The remainder of the “tax breaks” have little or nothing to do with jobs.  They would serve to subsidize health insurance, reduce non-compliance penalties, ease the tax treatment of cell phones, and expand deductions and credits.

In sum, pretty dull stuff.  Other than violating the maxim that targeted tax policy is rarely good tax policy, not much is at stake.

Why can’t Congress quit while it’s ahead?

Instead of actually acting on the expiring 2001 and 2003 tax laws, which would be a supremely beneficial move, Harry Reid chose to turn to S.3816, the “Creating American Jobs and Ending Offshoring Act.” Again, the bill is a collection of disparate items, ostensibly: (1) a payroll tax holiday for employers hiring US workers to replace foreign workers; (2) a denial of the tax deduction by a business for any costs associated with moving operations offshore; and (3) ending deferral for income of foreign subsidiaries for importing goods into the United States.

The reality is that this is a dangerous bill that would kill jobs and hurt competiveness.

(1) Evidently Democrats are looking for a little election-year boost by latching onto Republican proposals for broad-based payroll tax relief.  But a provision that promises that employers would be relieved for 2 years of paying their (6.2 percent) payroll tax when they hire employees in the U.S. to “replace” non-U.S. workers working outside the U.S. is anything but broad based.  It is hard to imagine that a temporary, 6.2 percent subsidy to a narrow sliver of jobs will outweigh the basic economics that underpin overseas operations.  Instead, about the only jobs likely to be affected are a handful of executive vice-presidents and their aides who could be located anywhere.  To keep corporate intrigue to a minimum, their bosses probably parked them in Zurich, but the Democrats want them back.

(2)  When Congress starts disallowing deductions because costs aren’t “legitimate” business expenses, duck.  This version is no safer, clearer or workable than usual.

  • How closely related must be the reduced U.S. operations and the increased operations overseas?  Will business expenses deducted for starting up outside the U.S. in 2010 be disallowed if domestic operations are curtailed in 2015?

  • It is good public policy to deduct some shut-down costs, like site clean-up, site conversion, or extended health insurance premiums for the laid off.  Should those be disallowed?

  • It will serve to penalize those with business scope and savvy.  If electronic communication supplants paper consumption in the U.S., demand for office paper may decline.  If at the same time demand for cardboard shipping boxes in China increases, a company with both communications and paper businesses may find itself penalized for responding to the shifts.

(3)  Lastly the Democrats take yet another counterproductive run at so-called “deferral”.  This provision is based on previous failed efforts by Senator Dorgan that have been characterized by their unique combination of unworkability and wrong-headedness.  But rather than belaboring the point-by-point policy flaws, let me simply note that this sound bite approach to tax policy is being unmasked as bad economics.  Even in Ohio, previously fertile territory for demagoguery regarding “offshoring” jobs, the press is catching on (see this editorial in The Akron Beacon, which is in turn based on a nice study by Kenyon College Professor William Melick).

With the economy staggering along at an anemic rate of growth and one in six workers looking for improved employment prospects, it would be in everyone’s interests to take an exorbitant end-of-year tax hike off the table. Or finally ratify long-negotiated trade agreements.  Or stand down on invasive regulation by the Environmental Protection Agency.  Even just saying “we’re sorry” for the health care reform will do as much for jobs as today’s Small Business Jobs Act.

But this is no time to do more damage.

Douglas Holtz-Eakin is president of the American Action Forum.