The Big Lie that Conservative Policies Are Good for Small Business

A small-business owner is seen in the kitchen of his restaurant in Belzoni, Mississippi, on  March 23, 2017.

Small businesses are often cited as the backbone of the American economy. They provide a career ladder of opportunity to being one’s own employer and encourage the innovation of products and services; they also enrich communities across America and act as a bulwark of democracy. And small businesses are essential to dispersed economic power. Whether Main Street shops or family farms, they provide a counterbalance to the economic power of the increased concentration of large corporations, bolstering the middle class and ensuring political vibrancy. Rather than employing thousands of lobbyists looking to gain an unfair competitive advantage through special interest loopholes and tax giveaways, small businesses must compete for their customers on a daily basis.

Small businesses have faced tough challenges in recent years, from the increasing difficulty of competing in monopolistic markets to the collapse in demand caused by the Great Recession. The lack of capital access was exacerbated by the Great Recession, but stagnating middle-class incomes and rising wealth inequality caused a decline in small-business ownership starting in the early 2000s. In fact, startup rates are on a 20-year downward trend that has only worsened since the financial collapse. (see Figure 1)

Unfortunately, conservatives have misidentified the challenges facing small businesses and are misrepresenting their needs to advance an ideological agenda in favor of large corporations and the wealthy. If policymakers want to move beyond politics to help reverse the downward trend in business startup rates, it is time to do something about the real challenges that small businesses face.

Let’s start by debunking five conservative myths about small business.

Myth 1: Regulation is crushing small businesses.

Despite claims from conservatives that regulation is bad for business and President Donald Trump’s statement that “We want to end the unfairness between small and big business that’s caused by regulation,” regulation is not inherently bad for business. Regulations such as those in the Dodd-Frank Act and overseen by the Consumer Financial Protection Bureau, or CFPB, help many small businesses access capital and overcome the discriminatory or predatory practices of some financial institutions. Section 1071 of the Dodd-Frank Act, for example, requires the CFPB to collect data on small-business lending to people of color and women, in an effort to address discriminatory lending practices. The CFPB also provides protections for individual consumer financial products, which are the backbone of small-business financing.

And progressive economic policies designed to increase the economic well-being of the 99 percent also help small businesses maintain consumer demand, since low- and middle-income families spend more of their income on consumption than high-income families. Countercyclical economic policies such as unemployment insurance—which helps unemployed workers remain consumers and raise their basic living standards—help small-business owners serve their broad and diverse communities. When a business has customers, it can handle regulation.

Furthermore, regulations simply are not the top concern of many small-business owners. In a recent survey, small-business owners list demand-side factors such as economic uncertainty and the cost of health insurance as their top concerns. While cost items including regulation, taxes, and benefits do register with owners conscious about running their businesses efficiently, the reality is that when all businesses face the same regulatory environment, they can compete on a level playing field.

Myth 2: Conservative tax proposals are primarily about helping small-business owners.

President Trump and House Republicans are arguing for huge tax breaks under the premise that they will help small businesses and the economy grow. Research shows, however, that the primary beneficiaries of conservative tax proposals are large corporations and the very wealthy. Current conservative proposals would reduce the top tax rate on pass-through business income—or business income taxed at the individual rate—to somewhere between 15 percent and 20 percent. But an analysis from the Tax Policy Center found that 92 percent of taxpayers with significant pass-through business income already fall in the 25 percent tax bracket or lower.

These proposals provide the greatest benefit for very wealthy individuals such as hedge fund managers—hardly anybody’s idea of a small-business owner. One National Bureau of Economic Research working paper found that pass-through business income is already taxed at very low rates and mostly goes to the wealthy. Indeed, income from partnerships—the leading type of pass-through income—was taxed at just a 16 percent average effective rate in 2012, despite 70 percent of it going to households in the top 1 percent of income.

Myth 3: If government would only get out of the way, small businesses could compete with big businesses.

Monopolistic practices and the lack of antitrust enforcement hinder the ability of small businesses to enter a new market and be successful. Increased market concentration has made it harder for small businesses to enter the market and to compete, even with innovative new ideas. A decline in the amount of new businesses entering the market has matched the rise in concentration. This is one of a number of data points suggesting that the anti-competitive behavior of some large corporations has excluded small businesses from the marketplace and led to a decline in entrepreneurship. For example, three companies control the majority of all U.S. pharmacies, and this has meant that fewer independently owned pharmacies are entering the marketplace.

Myth 4: The Affordable Care Act is an unnecessary burden for small businesses.

Despite claims from conservatives that the Affordable Care Act, or ACA, “forced millions of workers, families, and job creators into expensive, inadequate Obamacare plans,” the ACA has helped millions of Americans gain access to health care, especially small-business owners and employees. Current conservative health care proposals, such as the defeated American Health Care Act, would reduce access to health care and make it more expensive for most people to get comprehensive coverage. Such coverage allows people to start their own small business or work for a small business that does not provide coverage.

In fact, an Urban Institute study found that individuals were significantly less likely to become full-time entrepreneurs if they lacked health insurance through a spouse and had a family member in poor health. The ACA addresses this inefficiency by giving individual entrepreneurs access to health care without having to rely on an employer or a spouse; it also allows small businesses to find better insurance coverage for their employees. And young Americans are two to three times more likely to become entrepreneurs since the ACA made it possible for them to stay on their parent’s health insurance until age 26. This is partly because the ACA helps prevent “job lock”—or an individual being less likely to leave their current job because it would mean losing health benefits.

The expansion of Medicaid benefits, for example, has been found to increase occupational and industrial mobility, helping workers move into better jobs. While many conservative criticisms of the ACA have focused on the employer mandate, which requires businesses to offer health benefits, in 2014, more than 95 percent of all businesses were small enough that they did not have to comply with the health insurance mandate under the ACA. If the conservative health care proposals that reduce coverage were to become law, they would likely hinder small-business creation and entrepreneurship. This is especially the case among lower-income individuals and older Americans, the two groups who stand to lose the most under such health care reforms.

Myth 5: An unfettered free market in the private sector can support small businesses better than the government.

The Trump “skinny budget” released March 2017 proposes to slash funding for investments in small business and entrepreneurship. It significantly cuts funding for some of the most important programs that make entrepreneurship a pathway out of economic distress. For example, the budget slashes the Small Business Administration’s, or SBA’s, Program for Investment in Micro-entrepreneurs, which funds programs that help low-income entrepreneurs get training, technical assistance, and access to capital for their businesses. It even proposes eliminating the entire Minority Business Development Agency and the Economic Development Administration, which support Regional Innovation Clusters that bolster rising industries in new locations.

Trump’s skinny budget argues for cuts to programs that support small businesses on the grounds that the private sector can better provide these services. But as highlighted in a recent CAP report, the private sector is falling down on the job—and has been for a long time. African American households, for example, are 5 percent less likely to own a business than single white males, while Hispanic households are 6.7 percent less likely. Furthermore, female-headed households are 3.9 percent less likely to own a business than households headed by single white males. These disparities are largely due to a lack of incentives in the private sector to provide capital to these entrepreneurs.

Quite simply, the private sector does not expand small-business opportunity on its own—government has a critical role to play. The SBA, the Treasury, and other federal agencies need to invest more, not less, in order to close the wealth, training, and networking gaps that persistently deny Americans of all stripes—other than the already wealthy—the opportunity to start and grow small businesses. For example, the Treasury’s State Small Business Credit Initiative has made it easier for community banks to serve small-business customers, and the program has had full repayment of the funds from the state-run programs to the Treasury that were used to incentivize increased lending.

Conclusion

Despite all the focus on deregulation, lowering taxes, and trust in competitive market forces to support small businesses, the recent CAP report confirmed findings that access to capital resulting from economic inequality and structural discrimination—not from onerous regulation—remains the largest issue facing many small businesses. Getting access to capital is particularly difficult for people who face greater barriers to accessing financial markets, such as people of color and women. Conservative proposals, including Trump’s skinny budget, that decrease funding for crucial programs, as well as proposals to overturn the ACA, would make conditions even worse for entrepreneurs. Leveling the playing field means fairly enforcing regulations and progressive policies that help people build small businesses and ensure consumer demand for their products and services.

Kate Bahn is an Economist at the Center for American Progress. Regina Willensky is a Policy Analyst with the Economic Policy team at the Center.