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How both Obama and Romney are wrong on small business

By Matt Johnson, Managing Partner
October 18th, 2012, 1:44 p.m.

Every election season has its themes and tropes which the candidates and pundits constantly chatter about. As I'm sure everyone who has not been assiduously avoiding election news this year knows, this particular season's theme is the economy, the unemployment rate, and "getting people back to work." This, of course, means both candidates have had ample occasion to trot out age-old wistful tropes about their love of and support for small business. In fact, virtually everything they say about the problems facing small businesses and their proposed solutions is misleading and inaccurate. I'm going to talk about two specific falsehoods and two glaring omissions in their rhetoric. I'm sure there is far more I could cover, but these are the ones most frequently on my mind.

Falsehood #1: Government Regulations Hurt Small Business

In general, there actually aren't a lot of federal regulations that affect small businesses. Most of them, including employment verification and various tax filings, either are things small businesses are exempt from or things that do not rise beyond the level of minor nuisance paperwork. Even the much-discussed "Obamacare" health reform law won't actually impose any requirements on businesses with fewer than 50 workers.

Some businesses operating in more conventional trades (like construction, for example) are subject to various licensing requirements, but these are imposed by state or municipal governments and usually have some legitimate safety and consumer-protection justification. Very few, if any, small technology firms like Alley face any real regulatory interference from the federal government, and what regulatory requirements we do have are almost all handed by our payroll processor for a rather reasonable biweekly fee.

Falsehood #2: America's high corporate tax rate is hurting small businesses

In the most recent presidential debate, Mitt Romney alluded to the fact that the US corporate tax rate is 35% whereas in Canada, it is 15%. However, the majority of small businesses in the US do not pay corporate income tax because they are structured as limited liability companies, S corporations, or limited partnerships. All these corporate forms are considered "pass-through entities" by the IRS. This means that rather than the corporate entity paying income tax directly to the IRS, they pay no tax and merely file an informational return. The corporate profits are allocated directly to the owner(s) of the business, who report it as self-employment income on their personal tax returns and pay self-employment tax on it. These companies do pay payroll taxes for any employees that they have, but pay no income tax directly.

Who does pay the corporate income tax? Larger corporations that are structured as "C corporations" (the corporate form used by publicly traded companies with many stockholders). Such as it were, it's a widely known fact that most Fortune 500 corporations have deduced ways of avoiding most corporate taxes, so it would seem that rhetorical flourishes about lowering the corporate income tax rate are just that -- rhetorical.

Omission #1: The availability of revolving credit

Now that we've dispensed with a series of things politicians talk about constantly that do not actually occupy much, if any, of the mindspace of small business owners, let's talk about one huge issue that does: obtaining credit from the bank. For every venture-backed Silicon Valley golden child, there are scores of businesses founded on nothing but small change supplied by the owners and a lot of sweat equity. Silicon Valley refers to this as "bootstrapping"; in the rest of the world, it's just called "starting a business."

Many services businesses (including software consultancies like Alley) extend trade credit to their clients by default, i.e. we invoice you and you have 30 days (or whatever we agreed on) to pay us. This typically means we have a revolving balance of receivables (expected income). We have also fixed, non-negotiable obligations like payroll, insurance premiums, and office rent. This is the classic cashflow challenge of small consulting businesses, and the answer is for your bank to extend you a short-term, revolving line of credit to cover short-term cash needs until the next round of receivables comes in.

Right now, it's very difficult to get credit from a bank for this purpose. Perhaps if I were buying a tract home in Central California, Wells Fargo would be happy to throw as much money at me as I wanted. However, since the mortgage crisis banks have become extremely conservative about small business lending. They consider small businesses such a default risk that they refuse to even consider the business fundamentals and base credit decisions entirely on the assets or collateral of the owner(s). This is fine if you or your family are independently wealthy, but otherwise you're going to be facing a real uphill battle growing your business. Either you restrict growth to what your credit can reasonably support, or you take an unconscionable risk of bankruptcy by taking on liabilities beyond what your credit can cover.

The federal government could easily have demanded, say, a reform of business lending practices in exchange for the bank bailout in 2009. They could have forced banks to put more of their skin in the game as far as the U.S. economy is concerned by requiring them to ease lending requirements for small businesses. They did not, and no politician ever has come close to mentioning this problem of proposing a solution to it. The banks wouldn't like it if they did; it might cut into their obscene profits.

Omission #2: The high burden of health insurance administration

I, managing partner and operations lead of Alley Interactive, do not know anything about the health care industry, or the insurance industry. I'm a software developer by trade, and a small business operations specialist by necessity. There is no sane reason why I should be in charge of deciding what anyone's health insurance policy is. Yet, I do decide this, and on top of that I'm the one who has to sign the authorization allowing each new employee to get insurance. I also have to preside over renewals, billing incidents, and a whole host of other issues relating to health, vision and dental insurance. It's time I could be spending writing code, talking to prospective clients, or recruiting new employees.

To listen to politicians talk, you would think it is entirely inevitable that insurance is a byproduct of employment. It is not so in any other industrialized country, and I have to imagine this lightens the administrative workload and accounting complexity of business owners there, though I've not experienced it myself. I would also add that the regulatory framework in which health insurance in the U.S. operates really assumes that everyone company has a bricks-and-mortar office and has all its employees living in the same area. We, obviously, do not. Half our employees live in New York City and the other half are scattered about the U.S. This is a common arrangement for many Internet-focused businesses and virtually all of them struggle with trans-regional insurance policies. I've never once heard a U.S. politician, even the purportedly liberal ones, suggest that maybe business owners could spend more time doing their actual work and less time talking to insurance brokers if the federal government supplied health coverage for everyone. The insurance companies wouldn't like it if they did; it might cut into their obscene profits.

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