In election years, I love calling myself a “small business owner.” It’s the one time when the act of selling falafel, building a website or otherwise trying to make a buck comes off as heroic. We’re the “backbone” of the economy, you know, and the “heart and soul of equal opportunity,” as Fran Tarkenton told the Republican convention.
It’s the season when politicians shower us with love and policy papers. Both Donald Trump and Hillary Clinton have put forward proposals to make our businesses great again, together. I prefer Clinton’s, but mostly I think the election-year pandering to small businesses misses what really matters.
Trump, like most Republicans, focuses on tax relief. He proposes lowering the top rate for pass-through business income to 15%. This doesn’t move me. Why? My company doesn’t earn enough for the proposal to make much of a difference, as is true for most small business owners. The lion’s share of pass-through income is earned by a small percentage of businesses, which means wealthy individuals would catch a giant tax break while the majority of small business owners are unaffected.
Here’s the thing that tax-centric reforms tend to miss: When small businesses do well, we tend to invest that money back into salaries, hiring help or buying new equipment. In my previous business, we viewed it as a failure if we ended up with too big a profit. It meant we weren’t investing in growth.
But the bigger point is that most micro-policy solutions pale compared to massive macro-economic issues.
The biggest harm to small businesses in the last decade was not tax complexity or burdensome regulations – it was the opposite. Small businesses across America were devastated by under-regulation, which caused the financial collapse and resulting recession.
Trump has it backward when he cites financial regulation as the biggest burden on small business. Paperwork annoys us; economic meltdowns destroy us.
Today, another type of under-regulation poses a serious threat: The federal government’s reluctance, beginning in the 1980s, to enforce antitrust regulations. As a result, industry after industry has become dominated by a handful of giant incumbent players. The result has been declining market competition, few opportunities for new firms to enter markets, and falling rates of new business startups. As Barry Lynn and Phillip Longman wrote in The Washington Monthly:
Radical, wide-ranging consolidation of recent years has reduced job creation at both big and small firms simultaneously. At one extreme, ever more dominant Goliaths increasingly lack any real incentive to create new jobs; after all, many can increase their earnings merely by using their power to charge customers more or pay suppliers less. At the other extreme, the people who run our small enterprises enjoy fewer opportunities than in the past to grow their businesses. The Goliaths of today are so big and so adept at protecting their turf that they leave few niches open to exploit.
The trend towards monopoly has begun to alarm politicians in both parties. Yet while Hillary has nodded at the problem, neither she nor Trump have talked much about it during the campaign.
As the proprietor of a website, I live with the potential threat of market concentration every day. My company provides online memorials and other life commemorations. The firm I worry most about is not another small business – it’s Facebook, which increasingly controls traffic and revenue on the Internet. I’m not saying Facebook should be regulated but there’s no doubt that the market power of the big guys affects small business development.
The most important thing for a small business like mine is a thriving middle class. That’s not just rhetoric; my business offers online commemorative services for free, but we’re going to start charging in a few months. To make money, we need customers who can afford to pay. Let’s imagine a group of 100 potential customers. Each person (thankfully) has a finite number of deaths in their family, so even if one or two become fabulously wealthy, they won’t purchase more memorials. When all the income gains go to the top 1%, I’m pressured to focus on high-end concierge services rather than more affordable options.
Certainly many luxury-oriented business have done well with this strategy, but for a company like mine — in which the bulk of the costs comes from technology — a mass market model scales better. The marginal cost for each new customer is negligible, so I’d rather have 10 middle class customers than one millionaire.
This example also gives you a window into how income inequality can foster social inequality: Do we really want to live in a society in which only the wealthy can properly commemorate their deceased loved ones?
All in all, while I appreciate the attention we heroic small business owners get during election years, the policies that will help us most are the ones that also benefit the middle class:
1) Regulate the financial sector so it doesn’t tank the economy again
2) Combat monopolization so small guys have a chance
3) Improve the spending power of the middle class
Do all that, and you can feel free to leave my tax rates alone.