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Small businesses are said to be the backbone of the U.S. economy, and if past is prologue, it is the growth of small businesses that will lead to new jobs. Most agree that Washington needs to do what it can to foster economic growth, but with midterm elections approaching there is a vigorous debate among candidates as to what sort of help is effective. A panel discusses what Washington can and can’t do to help small businesses grow.
- Bill Rys tax counsel, National Federation of Independent Business
- Jacob Hacker professor of political science, Yale University
- Elizabeth Williamson reporter, Wall Street Journal
MS. DIANE REHMThanks for joining us. I'm Diane Rehm. With midterm elections fast approaching, candidates of both parties have locked on to a key group of voters, small business owners. Many are still reeling from the great recession, but it's this group that could have a hope for reducing the nation's unemployment rate. Joining me to talk about small businesses, what they do and do not need from Washington to promote growth, Jacob Hacker. He is professor of political science at Yale University. Elizabeth Williamson, she is a reporter with The Wall Street Journal. And Bill Rys, he's tax counsel for the National Federation of Independent Business. And if you'd like to join us, 800-433-8850, send us your e-mail to firstname.lastname@example.org. We already have a few messages posted on Facebook. You can also join us on Twitter. Good morning to all of you.
MR. JACOB HACKERGood morning.
MS. ELIZABETH WILLIAMSONGood morning, Diane.
MR. BILL RYSGood morning.
REHMAnd, Bill Rys, if I could start with you, begin, if you would, to define, what is a small business?
RYSSure. Well, we represent at the National Federation of Independent Business, exclusively small businesses. Our membership, well over 300,000 small business owners, is the largest small business advocacy organization in the country. In terms of what is a small business becomes a little bit harder to dig down and define exactly what is and isn't a small business. But in terms of industry, I mean, you're going to find small businesses in just about every industry from, you know, retail shops to small manufacturers to, you know, small, you know, doctors' offices. So they're in every community, every town in the country. In terms of how many there are or how you define them, if you just look through some of the data out there, there are about 20 million tax returns -- 29 million tax returns are filed every year with some form of business income reported on that return.
RYSSo that's sort of where the confusion begins in terms of defining a small business. When you begin to dig down from that, there are about 16 million individuals out there who are self-employed, basically meaning they employ themselves. They run their own business. And there are about 6 million small employing firms, and so when you start talking about firms that are employing, about 6 million small employing firms out there.
REHMOkay. You've given me numbers.
REHMWhat about income? What about how large a small business can be and still call itself a small business?
RYSWell, when you go with the SBA definition, the SBA defines a small business as 500 or fewer employees. So there are a couple of different places towards -- throughout the law where you can find definitions of a small business. Five hundred is the SBA definition. There's also a definition in a tax code that goes by the gross receipts, which is, I think, $15 -- $5 million in gross receipts over the course of three years. So there is a couple of different definitions in the law for, you know, for the SBA programs. You know, the 500 is the thresholds in terms of employees. But for certain tax provisions, you'd look at this gross receipts number. So there are a couple different definitions in the law.
REHMSo, for example, if you had a law firm of 500 lawyers, it would depend then on how much money they brought in as to whether they were defined as this...
RYSWell, that would be for two different things. I mean, for an SBA program, you'd be looking at the number of employees. For some of the tax issues, mostly how you -- what kind of accounting system you use, you'd be looking at the gross receipts. So depending on which law you're looking at, you're going to look at the different sides.
REHMOkay. But if you're looking at two different laws, which is going to prevail?
RYSWell, again, it depends on which you're applying to. So that's the...
REHMSee, this is why I had this problem. This is why millions of Americans, I think, are confused about what is a small business. Elizabeth, how do you see it?
WILLIAMSONWell, Diane, out on the campaign trail and when you travel with the president or talk to small business people, you find that being a small business is much more a state of mind than it is a number of employees or the amount of money you bring in in a year. And most small businesses, I think, consider themselves to far fewer than 500 employees and far fewer than $5 million in revenues over three years. And that is where you really hit the -- or the rubber meets the road, if you will, on regulations. Those are the businesses for which one regulation is a make-or-break type situation. And in this election, what they're doing is sort of betting the farm in supporting a candidate that they feel will roll back some regulations that threaten their businesses.
REHMGive me an example.
WILLIAMSONSure. One is Rick Woldenberg, who I visited in Vernon Hills, Ill., a Chicago suburb. Rick owns Learning Resources Incorporated, which is a small toy educational products and toy business, and what he's struggling with is the Consumer Product Safety Commission rule on the lead content in children's products. This is a fairly straightforward rule. But when it's interpreted into regulations, it's led to a lot of confusion and a lot of compliance costs for his company. They've never been cited for a lead issue. They've had one small recall in 30 years of business, 40 years of business.
WILLIAMSONBut what they're doing is struggling with labeling their products, trying to define, what is a children's product? A certain type of a pen, if it has Elmo on it, is a children's product. The very same pen without Elmo on it is not a children's product -- that sort of thing. So he feels that this law, as it's interpreted gradually into regulations, is going to put him out of business. So he's begun raising money for a Republican, a real upstart candidate, who's running against the -- one of the Democratic authors of the law in the district next door to his business.
REHMOkay. So what about monies given to the campaigns pretty much split between Democrats and Republicans?
WILLIAMSONIf you look at disclosed figures, Diane, we were almost at $1 billion contributed by business groups split evenly. About 53 percent of that money goes to Democrats. But if you look at undisclosed contributions -- and this has been the source of controversy in this election -- these -- the money that goes to the Chamber of Commerce, that goes to various so-called C4 groups like American Crossroads, Crossroads GPS -- that's about $300 million so far. And that overwhelmingly favors Republicans.
REHMAnd turning to you now, Jacob Hacker, he is the author of "Winner-Take-All Politics: How Washington Made the Rich Richer--and Turned Its Back on the Middle Class." For whom does Washington work, and for whom does it not?
HACKERWell, thanks for having me on, Diane. And I wanted to say right upfront this book was written by -- with my co-author, Paul Pierson. And in the book, we basically argue that Washington has been much more responsive to the wealthiest of Americans and big business over the last generation than it has been to the middle class and to small business. I mean, if we were to complete that title -- and it's already long enough -- we might say how Washington stopped working for the middle class and for the main street economy. Because if we look at this current downturn, it's really the workers and small employers that employ them that are really suffering, and they're feeling the same kind of anger and angst and pain, I think, that many Americans are in this current downturn. And the real challenge is to think about, well, if our economy isn't working very well for the small business sector, as well as the middle class, first of all, why is that, politically?
HACKERI mean, 84 percent of Americans have a positive image of small business. And most Americans believe that the middle class is not just small business, but the middle class is the backbone of the economy. But we've seen over the last generation that most of the gains of economic growth have really gone to a tiny slice of people. In fact, one of the interesting stories that we'll probably get into today is that those small businesses that are often being talked about, some of the big money is really in hedge funds and law firms, in the winners and the winner-take-all economy that we write about. So when people think about small business, as Elizabeth said, it's really a symbol, a symbol of an economy that's -- where prosperity is broadly shared, that supports entrepreneurship and economic growth. And so when they talk about how small business is being hurt, they're often really talking about how the middle class is being hurt in this economy.
REHMYou know, it's so interesting because both small and large businesses were hurt during the meltdown of 2008. But yesterday, we hear the JP Morgan Chase third quarter profits rose 23 percent. It's as though what happened hurt somebody but not everybody, exactly as you say, Jacob.
HACKERYeah, we could talk about this as, like, a tale of two economies, just like "A Tale of Two Cities" because there's the main street economy where Americans are living paycheck to paycheck, where businesses aren't hiring. But there's also this Wall Street economy, which -- parts of which, I think, have spilled over into the business world. I would say that some of the top CEOs at big corporations rely more on Wall Street and its performance than they do on main street.
REHMSo, Bill, why do you see…
RYSJust sort of playing off...
RYS...what something Jacob said. He said, what Washington is doing for the economy -- I think part of the problem to what small business is going through is -- what is Washington doing to small business? And this is part of the challenge. We talk about something like the regulations that Elizabeth was talking about. Our average membership -- going back to, what is a small business -- it's about eight to 10 employees. The ability to deal with things like this lead paint issue for a smaller firm -- if you're of a small business, if you have a toy shop that has 10 employees, and you've got to take everything out of your inventory and try to find a place where that's -- where those things have to be screened. Nothing was really thought through as to, how is it that we go out and meet this -- the laudable goal of ensuring that toys are safe for children, is a good policy decision. But the problem becomes the implementation of that.
RYSWhen the implementation of that becomes such that smaller firms are put at that kind of a disadvantage, that's the real problem we're seeing coming out of Washington. That is just a small example. We've had situations with smaller construction firms. Construction is a big source of small businesses. There are a lot of smaller firms that have sprung up. And part of that has been the boom in housing. You know, there's opportunities to do drywall, lay pipes, do electrical work. It's been a great opportunity for entrepreneurship in that sector of the economy for small firms to come along, for people to go out and strike their own, you know, strike their own way. But some of the regulations that have come down dealing with the construction industry has been to the detriment of those businesses when they're trying to latch on and come back.
REHMBill Rys, he is tax counsel for the National Federation of Independent Business. We'll take just a short break, right back.
REHMAnd we are back, talking about small business, the politics that are affecting small business, the economic reforms, the taxes, the healthcare -- all of that affecting not only small but large business as well. Elizabeth Williamson, as a reporter for the Wall Street Journal, you were talking earlier about a small company where one individual toy maker, toy business, moving his vote from Democrat to Republican because he was concerned about lead content and the Consumer Product Safety Commission. What about healthcare? What about taxes? Are those also issues that small business owners are really concerned about?
WILLIAMSONAbsolutely, Diane. When I was traveling with this toy manufacturer, we went to a small business breakfast in Chicago where businesses stood up, and they gave a series of candidates their concerns. And chief among them was a provision in the healthcare law that requires small businesses to file a 1099 for any vendor of goods or services valued at more than $600. They used to have to file this for services only, and, now, they're faced with just this amazing amount of paperwork. The administration itself, the White House, has sent Secretary Geithner from the Treasury and Kathleen Sebelius from Health and Human Services to persuade Congress to try and roll this back, or at least minimize the paperwork. This is one of the unintended consequences of the healthcare bill for small businesses that they're very upset about, other than the cost of healthcare itself.
REHMBill, how do you see it?
RYSWell, when we talk about the issues that are most important to small business right now, it's the cost of healthcare. It's taxes, and it's spending. And that's exactly right. And the provision like the 1099 thing is really the perfect example of Washington not thinking about how a small business operates. You know, it's 66 percent more expensive for a small business, rather than a large business, to file their taxes. When you add on something like this 1099 burden, that becomes exponentially higher. Small businesses don't have an accounting department. They don't have a finance department.
RYSA lot of times the paperwork is being done by the owner. They're doing it at night. You know, you're making muffins in the bakery in the afternoon with your workers. At night, when the shop closes, you're trying to fill out all these tax forms. This changes the equation about how much paperwork a business owner has to do. Tax paperwork is the most expensive paperwork burden the federal government places on small business -- an average of about $74 per hour when you consider how much time, how much time is going to your accountant or your, you know, agent to figure out what your tax liabilities are. That becomes a big problem.
REHMOkay. So take, for example, this proposed $250,000 tax limit for individuals. How would that affect small businesses?
RYSWell, the current tax rates -- the expiration of the current tax rates is a big concern for small business.
RYSAbout 75 percent of small business owners are structured in a way that they pay tax on their business income at the individual level. So those individual rates are very important. Keeping those individual rates low are very important to small business owners. We at the NFIB, and what our members are telling us is we got to extend those current rates. No small business right now should face a tax increase, and that should include those businesses that report over $250,000. That, often times, is operating capital. It's not money that the business owner takes home to spend on whatever he wants. It's business -- it's money that tends to get plowed back in the business.
RYSAnd when we've talked to members, when we've talked to small businesses, and we've dug a little deeper into this -- and like I said, the IRS data can be confusing -- so we sort of dug through that and went straight to small business owners and asked them. Businesses that employ between 20 and 250 workers, about 40 percent of those businesses are going to be reporting that amount of income. Those businesses account for one-quarter of the American workforce. So at a time when we're talking about 9.6 percent of unemployment, businesses account for 25 percent of the American workforce -- shouldn't be looking at a tax increase.
HACKERWell, I think this is an example of what we -- of what Paul and I write about in the book. That is, a real distortion of who's the real beneficiaries of these kinds of tax changes? The fact is, is that the tax -- upper income tax cuts that we're talking about are really going to go to the richest of the rich. Fully, I think, it's something like a $130,000 tax cut per millionaire -- people who make more than a million dollars a year. When you look at small businesses, even the Republican leader, John Boehner, admitted very, very few will be affected, something like 3 percent. And at the same time, it is true that those 3 percent of small businesses have a lot of money. Apparently, they make up something like 50 percent of all the income reported at that level.
HACKERBut what we should understand from that is that this isn't really what we have in mind when we talk about small business, so small businesses are basically a cover for more tax cuts for the really rich. We're talking here about companies like Bechtel, PricewaterhouseCoopers, large hedge funds and law firms. And, in fact, we're talking about people like President Barack Obama, whose author royalties he reports as small business income. And one of the things that I think people don't understand very well is that over the last generation, the richest of the rich have just shot into the economic stratosphere. And part of the reason they're doing so well is that government has helped them. It's cut their tax rates, even as middle class Americans have struggled, and this is just another example, in my mind, of a kind of distortion of the reality to try to shower more and more largess on the very richest.
RYSIf I could -- just really quick -- you know, when we talk to our members, these aren't just those companies. We're talking about small construction firms, small manufacturing firms. We hear this from business owners that fall outside that category. And these are people that are creating jobs, but it's a tough economic environment. And this is not the time to be raising taxes on these businesses.
REHMAll right. And we're joined now by phone by Rick Poore. He is the owner of a small business in Lincoln, Neb. Good morning, Rick.
MR. RICK POOREHow are you?
REHMI'm fine. Thank you, sir. Tell us about your business. How many employees do you have?
POOREWe have 30 employees. I'm -- we're a screenprinting and embroidery business in Lincoln, Neb. We do business across the country pretty much, got 30 employees, and that's about it.
REHMOkay. What I want to know is your own reaction, your own thoughts, about extending the tax cuts for small business people like yourself.
POOREWell, you know, I've been listening to the conversation, and I'm not sure whether anybody on the panel has actually run a small business. But I've got to tell you, I'm a little confused about what a small business is as far as the number of employees.
REHMSo am I.
POOREBelieve me, if I had 250 employees, I'd think I was a big business. But we -- you know, we don't wake up very morning and wonder about the tax code or where, you know, we wake up every morning and start running to run our businesses. And I really do believe that anybody that shows a $250,000 profit at the end of the year needs to fire their accountant. I mean, it's just -- there's a little thing called tax planning. And the one gentleman was talking about we put money back into business. Yeah, that's how we reduce that taxable income. I just -- you know, I'm just a little confused about what -- when you start talking about 500 people being a small business.
POOREThat's just not a small business.
REHMOkay. Let me ask you, Rick. How much do you make each year in annual sales?
POOREWell, you know, any small business is going to be an S corporation or a partnership or -- but that money is going to funnel down through, and we're going to -- you know, we're going to have that income on our bottom line as an individual. I make less than $100,000 a year. We do about $2 1/2 million in sales, and I pump as much of that money, you know -- at the end of the year, if I show -- if I'm looking at a $130--, $140,000 profit, I'm going to invest that money in the equipment. I'm in Vegas right now buying a $90,000 press. I've hired four people in the last five months. Business is good.
POOREIf I listen to the news too much, I'm afraid I'd think otherwise. (unintelligible)
REHMOkay, but tell me this. If the Bush era tax cuts on the top two brackets are ended, how is that going to affect you?
POOREIt won't. It won't affect -- the only people that's going to affect is -- like, the one gentleman is saying -- hedge fund managers and lawyers, maybe some doctors. But let's get this in perspective. We're talking about a 4 percent -- and calling it an increase, rolling back the cut in taxes that Bush brought about. Four percent -- that's still 10 percent less than the great tax-cutter, Ronald Reagan. I mean (unintelligible)
REHMAll right. Rick Poore, he is the owner of a small business in Lincoln, Neb. Jacob Hacker, how do you react?
HACKERI think Rick makes a good point that for most business owners, this isn't their central concern when they wake up each morning. You know, to go back to something that we were talking about before, healthcare is really front and center. The NFIB's own surveys show that's the number one concern. And, yes, there are these unintended consequences of the bill. But they're intended consequences as well. I think small -- 4 million small business owners received a letter from the IRS. And it was telling them something good, that they were getting a tax credit to provide health insurance under the new bill. The bill does not require that small business owners provide coverage.
HACKERIt is going to allow small business owners in 2014 to get coverage through these new health insurance exchanges, where they might be able to get cheaper private options. And, in fact, surveys that were done during the healthcare debate showed that small business owners were actually pretty favorable to the idea of having shared responsibility between employers, workers and insurers. So I -- my view is that a lot of this debate is driven by the fact that we're in the worst economic downturn still since the great recession. And, of course, small business owners are hurting. They're hurting far more than those at the very top. They're hurting like the middle classes.
WILLIAMSONI think on the healthcare issue, it was interesting in that it wasn't so dire a picture when you actually talk with small businesses in that they were still hopeful that by 2014, when a lot of these provisions kick in, that they would benefit. And that they are able to look at a fact sheet distributed by the White House that will explain that they do derive some benefit from this bill. But as these sort of unintended consequences pile up, as the administration makes adjustments, for example, to provisions that were preventing some employers or at least making it very expensive for employers to provide part-time employees with healthcare -- that sort of thing -- this lends itself to uncertainty. And uncertainty is really the death knell of any business of any size. And this is something that I found that small business owners were complaining about most frequently, that they just are unable to predict what this bill holds for them in the future.
RYSYou know, and when you dig in to the details of that healthcare bill, we talk about the small business tax credit for health insurance. Rick in Nebraska doesn't get the tax credit. He has too many employees. He can only have 25 employees and get that tax credit. So Rick doesn't get it. So it really doesn't help that many small businesses.
RYSThey sent out four million cards, but those four million cards were just sort to tell you, hey, you might get this. When you actually dig into the details, very few small businesses get it, and it is so small, it's not going to have any impact.
REHMBill Rys, he is tax counsel for the National Federation of Independent Business. You're listening to "The Diane Rehm Show." The question that seems to come up an awful lot on the political hustings is, if you extend these tax credits to small business owners earning over $250,000, that they will then hire more employees. However, Congressional Budget Office has said that extending or increasing this after-tax income typically does not create much incentive for them to hire more workers in order to produce more because production depends principally on their ability to sell their products. Elizabeth.
WILLIAMSONYes, that's absolutely true, Diane. There has been survey after survey that has said -- the Business Roundtable, for example, just did a survey of business owners, and they're larger in size. But those results mirror what small business owners say, and that's that there definitely is this element of uncertainty. There is also the fact that sales are what drives hiring. If sales don't go up, they will not hire. And you see this with the $1.8 trillion that big businesses are holding, that they'll use that as a sort of stick to get what they want in terms of the tax code. But the bottom line, when you survey them in a serious way is that if they don't have greater demand for their products, then they will not hire.
REHMWhy are these big corporations holding on to so much money, Elizabeth?
WILLIAMSONWell, I think they give different reasons at different times. But essentially what they're doing is waiting for -- and it depends on the type of business as well -- but they are waiting for sales to improve. They are waiting to see the results of some of these policies come down the pike. They are waiting for changes in the tax code. They're pushing for a total overhaul of the tax code. And they're also looking for the administration to make some moves in the direction of doubling exports over the next five years as the president has pledged to do.
RYSYou know, we look at our -- we do a monthly economic survey of small business owners. And the number one problem since the beginning of this recession has been lost sales. That continues to be the persistent number one problem. But following not far behind that is uncertainty. Lost sales is a lot harder to deal with from a policy perspective, but that uncertainty the business owners are talking to us about -- uncertainty about their tax rates, uncertainty about their healthcare cost, uncertainty about their energy costs, uncertainty about government spending -- that's something Washington can do something about, and they haven't. They've only made those problems worse. That's something they could fix right away, and they haven't done that. There has to be a certain amount of time in terms of getting those sales back. When you're living in this uncertain environment for the business owner, and you don't know what are going to be the costs of my health insurance because of this new healthcare law? Do I have to fill out all these form 1099s? What's my tax rate in January? Those are all uncertainties that you can't build in to planning.
REHMWhen you think about what Rick Poore said, he still doesn't understand what a small business is. I still don't understand whether there are limits to how much an individual proprietor can earn. I don't understand this, Jacob.
HACKERWell, I think you're not alone. And that's part of the reason why small businesses are -- get bandied out as sort of the -- as a reason for some of these upper income tax cuts. For most people, their image of small businesses -- and it's certainly my image of small businesses -- is of these small mom-and-pop operations or small entrepreneurial start-ups. And one of the things that I want to note is that the U.S. -- you know, it's part of the broader story that we tell in "Winner-Take-All Politics" -- that the U.S. has done a very bad job of updating its policies to reflect the way in which the economy has changed. There's a need, for example, for more support for self-employed workers.
HACKERUnited States actually lags behind a lot of other rich democracies in helping entrepreneurial self-employed workers or small businesses, partly because our healthcare costs are just so high. So I agree completely that we have real problems with health -- with energy and healthcare costs. And healthcare costs are big part of the deficit problem that creates uncertainty. But I think what happened when President Obama came in, is that he appealed directly to large employers mostly to say, okay, we've got to tackle these long-term problems. And for a little while, there was their positive statements, but, now, I think big business and its lobbyists swing against financial market reform. They swing against healthcare reform, and I think small business might end up paying the price.
REHMJacob Hacker, he is co-author with Paul Pierson of "Winner-Take-All Politics." We'll take a short break and be right back.
REHMWelcome back as we talk about small business. As you may recall, during the last presidential campaign, Cindy McCain identified herself as a small business owner. Wikipedia tells us that the Hensley & Company -- the Anheuser-Busch beer wholesaler that she owns -- earned $340 million. It was founded in 1955. It has 650 employees. Help me out, Bill.
RYSI really can't speak to her business in particular, but you look at a lot of smaller businesses that are in the business of wholesaling -- it's a very typical business -- they've grown. And that's a good thing.
REHMWell, they -- you know...
RYSSo if you start small, and you get bigger, that's a good thing.
REHM...they've grown, but for heaven's sake...
RYSThat's what we want. We want job growth.
REHMYeah, of course we do. Here's an e-mail from Mark who says "I'm a CPA working in Birmingham, Ala. And the way Republicans frame this debate is ludicrous. Let's use the example of a small business owner whose net income, gross receipts less expenses, is $250,000. His taxes will not go up if the portion of tax cuts for the wealthy are allowed to expire. Now, let's look at the example of a small business owner whose net income is $350,000. How terrible will the expiration of the tax cuts be for him? He'll end up paying an extra whopping $3,000 a year. Is this what we are so upset about? How will this lead to the economic Armageddon that Republicans are predicting?" Elizabeth, are Mark's figures accurate?
WILLIAMSONThey sound pretty accurate to me, Diane. I think that this -- to some degree, this small business aspect of the debate over the tax cuts is a canard. I mean, there are a number of small businesses that say that they will be impacted by this. But, I think, if you look at, you know, the basic Mr. Poor's definition of a small business, these guys aren't thinking about this. They're not going to feel it. It's not going to make a difference to them.
REHMAnd here's another e-mail from Karen who says -- she's in Dallas -- she says, "I've owned my business for eight years. There are six of us in the small human resources consulting firm. We are not seeing client companies complaining about taxes. What they are complaining about is that they have no access to credit to expand the business, buy capital equipment and hire more staff. They're sound businesses in a strong financial position, but financial institutions are not lending." Jacob Hacker.
HACKERYeah, it's a striking fact that even though there's all this cash at the top financial institutions, the president and Congress felt moved just recently to pass a bill that would extend $20 billion in loans to small businesses. Now, that may have been a good step for small businesses, but obviously, it would be much better if these businesses were getting money through private sector means. Why isn't that happening? It's a real puzzle. Elizabeth and I were talking about it at the break. And a lot of the top CEOs are basically offering kind of disingenuous arguments about what's happening. I think part of what's happening is that, right now, things look pretty good for those CEOs, and they look pretty good on Wall Street. So there's no real need to rock the boat.
HACKERI would just want to say one more thing about the tax cuts because the debate's always framed about, you know, do you or do you not want a tax cut? And, of course, we all want a tax cut, but it's not free money. We're talking about $70 billion. And that money could have been spent -- could be spent in a lot more effective ways to boost small business job growth. And...
REHMAll right. To Durham, N.C. Good morning, Jim.
JIMGood morning. I'm a small business owner in Durham, 13 employees. We do home repairs, and I've been in business 16 years. I've yet to make 250K. My goal for 2011 is to make 255. So I'll gladly pay extra tax on $5,000 out of appreciation for this wonderful country. And if I may make another point...
JIM...I think the Republicans' bogus claim -- excuse me -- in my opinion, a bogus claim -- that the fat cats are afraid to hire because they're afraid they'll lose their charity. I think that's bogus. Small companies like mine and large companies hire when and only when their company will benefit from having another employee or another hundred employees.
WILLIAMSONThat's absolutely true. I think that what businesses, what you're seeing -- when economic statistics come out, what you're seeing is that businesses will do almost anything before they begin hiring. If they're unsure that they're able to use those additional employees, they'll work the employees that they have longer hours. They'll make part-time people full-time. But they really do -- because of the cost -- the added cost, it's not just an employee's salary. It's the benefits, et cetera, and it's also the cost of retaining them and the idea that should you have another downturn, which has been predicted by some, that you'd have to let those individuals go.
REHMAll right. To Flint, Mich. Good morning, Brice.
BRICEGood morning, Diane. How are you?
BRICEWonderful show today. Really, really great.
BRICEI'm really enjoying it. I just wanted to make one comment and a question about taxes. On the comment, who -- the gentleman who keeps saying that you don't raise taxes 'cause it kills jobs during a recession. Reagan raised taxes, okay -- couldn't raise taxes, and we saw a huge job growth. So it's simply not true. The question, why don't we ever talk about payroll tax cuts? I hear about income tax cuts, capital gains, business (word?), but if we want to spur demand -- excuse me. I'm sorry.
REHMWhat do you think, Bill?
RYSWell, first on the 1990s and the tax increases then, there was also a capital gains tax cut. You also had huge investment with -- preparing for the Y2K issue. So, you know, it's kind of apples and oranges. But in terms of the payroll tax holiday, the first thing we at the NFIB argued for -- when we're talking about a stimulus -- was a payroll tax cut holiday. I mean, that's money that the business pays immediately. I mean, you have to pay it quarterly, so it comes right out of your cash flow.
REHMYou're talking about money that goes into the Social Security fund.
REHMI don't understand why we keep calling that a payroll tax. This is money for Social Security.
RYSWell, it's tax based on your payroll. So that's why it's called a payroll tax.
REHMWhy sure, but it gets hidden in people's minds.
RYSWell, and there's actually three components to it. There's Social Security. There's Medicare. And also at the state level and the federal level, it's unemployment insurance. And one of the things we've seen in a lot of states -- Nevada, for example, just recently talked about increasing the portion of their unemployment tax by 50 percent to deal with the shortfalls they have because they've basically drained their unemployment fund. So, you know, the same businesses that were saying, hey, we need to get you out there and hiring are seeing other kinds of tax increases, not just their income taxes.
REHMAll right. Let's go to -- I think it's Mattapoisett, Mass. Is that right, Paul?
PAULYeah, that's correct.
REHMOkay, sir, go right ahead.
PAULYeah, well, I have a small business. We make boats. There's three of us here. I -- people have somewhat made the point I wanted to make, but -- especially Jacob there -- but I would hire people if there were less downside risk to hiring. And, for example, if it doesn't work out, it will cost me about $15,000 in unemployment insurance...
REHMWhat do you mean…
PAUL...to lay somebody off.
REHMWhat do you mean, if it doesn't work out?
PAULWell, if I think I have enough business to hire somebody.
PAULAnd either the person doesn't work out or the business falls off later, that's a huge cost down the road. And I haven't heard anybody anywhere talk about lessening that risk, you know, in the same way that we bail out Wall Street when they take a risk.
REHMGood point. Go ahead, Bill.
RYSHe's exactly right. I mean, part of the risk of bringing on a new employee in these tough economic times are, you know, if you do have that downturn, you have to let them go. State unemployment taxes are called experience-rated. It's based on how long or if someone's been laid off from your business. So your tax rate and that -- sort of relative to that tax goes up if you lay somebody off. So you kind of get hit by the double whammy, and at the federal level. Back in the late 1970s when we depleted the unemployment insurance fund then, we added a store tax to the federal tax. It was a separate temporary surtax. Here we are, 2010, that temporary surtax is still in place.
RYSSo these are the kind of problems that small businesses face. When we talk about -- you're listening to small businesses, these are big tax increases that come right out of your bottom line every quarter. And when you increase that tax, and you call it temporary -- and here we are 30-plus years later -- that's not temporary.
REHMTo Dallas, Texas. Good morning, Brett.
BRETTGood morning, Diane. Great show.
BRETTI completely agree. I've never made a decision -- I've been in business 20 years. I've never made a business decision on tax cuts. But I run a contracting business here in Dallas, and one thing that I never hear about in this debate is enforcement of our labor laws. And I compete every day against people that use illegal immigrants as labor. And I believe exploit -- am I -- you know, I pay Social Security. I give them healthcare and benefits and all that kind of stuff, and I lose jobs. And I know a lot of good contractors out there that lose jobs every day because we can't compete on the labor front.
BRETTAnd I never hear that in this debate.
WILLIAMSONI think this is typical of some of the concerns that are raised by small businesses out in the field, but they are not raised in Washington -- or they are, but they're just not on the plate yet. The -- you know, the legislative agenda, so far, has not included immigration reform. But I was just looking at this list of tax cuts that the president has said, that have been, you know, 16 tax cuts enacted for small businesses. And again, this is where you really see the problem with the definition in what is a small business. Because if you have 500 employees, you would still fit the SBA definition of a small business, and you could benefit from the five-year carryback on that operating losses or the 75 percent exclusion of small business capital gains or bonus depreciation. If you are a T-shirt maker or a T-shirt printer, you may not benefit from that.
WILLIAMSONI talked with a pizzeria owner who said, you know what the biggest deal was in those 16 tax cuts? It was my ability to write off cell phone charges. This was a huge deal for this man because he operates six pizzerias. He has a number of employees, and they're constantly communicating with each other. So there is a disconnect, both in the definition and both in the remedy that's devised by Washington and what's really needed by small businesses in places like Texas.
HACKERI think that the caller raises a larger issue, which is many small business owners don't feel that they get to compete on a level playing field with each other or with large corporations. And I'll just mention another aspect of that. If you work hard and play by the rules in Bill Clinton's term and provide health insurance to your workers, you may face a really tough competitive situation. And one of the things that the healthcare bill will hopefully do is make it easier for firms to provide coverage in affordable ways so that there isn't that tilted playing field. But how did the playing field get tilted? And then you get back to winner-take-all politics. You know, you get back to the fact that in Washington we have the golden rule -- he who has the gold, rules. And the lobbyists are not representing, for the most part, small businesses. I mean, the NFIB is an organization that's out there. But right now, if you look at where the money is, it's coming from the largest corporations who have been lobbying on financial regulation, healthcare to reflect their interest.
HACKERSo any time these regulations come down the pike, they get tilted in ways that they're going to help the richest of the rich. And we have a winner-take-all economy, and you see that in what gets counted as small business, too. I'll just mention one example of that, which is apropos of what you were saying about Cindy McCain. In partnerships with over $50,000 in receipts -- I'm sorry -- $50 million in receipts, those accounted for two-thirds of all partnership income. But they only accounted for .2 percent of all tax returns. So what we're really talking about, right, is the money is concentrated at the very, very top. And these are not what we think of when we think of small businesses.
REHMBut why do we keep defining them that way? Why does the government continue to create these definitions through which these loopholes can be created? I mean, Bill, I'm truly not trying to attack small business. What I am really upset about -- and I think lots of people are -- is the idea that there is such mush about these definitions that people can worm their way through.
RYSWell, I mean, some of this is the challenge. And we go back to Rick Poore in Nebraska. I mean, he's clearly a small business.
RYSBut he's not going to get that small business tax credit. So, you know, I mean, this is part of the challenge with trying to identify small business within various laws. And then when you get to the other challenge with something like that tax credit, it costs money. So you have to limit it to keep the revenue down.
REHMAnd you're listening to "The Diane Rehm Show." Let's go now to Findlay, Ohio. Good morning, Brian.
BRIANGood morning. How are you?
REHMI'm good. Thanks.
BRIANYes, ma'am. I just have a quick point, that since the $250,000 is such a -- kind of the magic bull that everybody's -- like me, I'm a working student. You know, I'm outraged that perhaps the Bush tax cuts, by continuing to be extended for those -- the wealthiest people. Well, why couldn't -- isn't there any way that we can -- they can amend those tax cuts so that they would, you know, moderate people's opinions, like maybe put a million dollars. You know, because obviously small businesses sometimes -- you know, $250,000, you know, even somebody like me that don't make that much money, that'd feel like that's a terrific sum. But somebody making a million or more, you know, I don't want them getting a benefit from furthering tax cuts.
REHMI do understand that. Elizabeth.
WILLIAMSONWell, the president's answer to that, Diane, and to the caller, has been to eliminate that upper bracket and to keep the tax cuts for the middle class. And that hasn't gone anywhere, so that's sort of at the crux of the debate. The other alternative is to overhaul the entire code and to provide some additional benefits for middle class people and business owners.
REHMSo where do you see this argument going?
WILLIAMSONIt depends on the composition of Congress after Nov. 2. It really does.
REHMAnd, you know, it's as though the president is almost ready to compromise.
WILLIAMSONHe has sent signals in that direction, as has John Boehner, the majority -- or, I'm sorry -- the minority leader.
REHMBut then he backed off. He backed off.
REHMJohn Boehner backed off. What do you see happening?
HACKERWell, I think this is a perfect illustration of winner-take-all politics because what we've seen is, essentially, the Republican Party has gotten pulled to the right by the rise of business -- the organization of business, the role of big money in politics. But the Democratic Party has been really cross-pressured. You know, it stands for the little guy, but at the same time, it needs to raise money. And there's a great quote from Rahm Emanuel, where he's talking about how he was able to get this -- get back Congress where he says that during a campaign, basically in the first phase, you need to have, you know, money, money, money. And the second phase, you've got to have money, money, press. And in the third phase, you have to have money, press and votes. And for those keeping score at home, that's money, six, votes, one. So money matters a lot, and money has pulled both parties. And that's why the Democrats -- a big chunk of the Democrats just weren't willing to take on this issue, even though it was a winner with the public. And it's just a really misleading issue as we have been discussing.
REHMJacob Hacker, he and Paul Pierson, have together written "Winner-Take-All Politics." Elizabeth Williamson is a reporter for the Wall Street Journal. Bill Rys is tax counsel for the National Federation of Independent Business. Thank you all so much. Thanks for listening, all. I'm Diane Rehm.
ANNOUNCER"The Diane Rehm Show" is produced by Sandra Pinkard, Nancy Robertson, Susan Nabors, Denise Couture and Monique Nazareth. The engineer is Tobey Schreiner. Dorie Anisman answers the phones. Visit drshow.org for audio archives, transcripts, podcasts and CD sales. Call 202-885-1200 for more information. Our e-mail address is email@example.com, and we're on Facebook and Twitter. This program comes to you from American University in Washington. This is NPR.
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