The Hill (CFED)
By: Robert Friedman
July 22, 2011
"Tax cuts for job creators!" It is a rallying cry echoing these days from both ends of Pennsylvania Avenue. For Republicans in Congress it means never raising taxes on the wealthiest 2 percent of the population. The White House, meanwhile, is considering a general reduction in payroll taxes for all.
Both scenarios, however, miss the real job creators: new businesses under one year old and typically unincorporated, which have added an average of 3 million net new jobs a year to the American economy. That's more than all other categories of business combined, according to recent studies by the National Bureau of Economic Research and the Ewing Marion Kauffman Foundation.
Most of these real job creators are people shaping jobs for themselves - out of necessity and opportunity. Examples of these businesses include childcare, landscaping, graphic design, construction, catering, pet sitting and home cleaning.
Not all of these jobs are full time and some may not last. But even part-time jobs can mean the difference between poverty and subsistence--despair and hope. Forty percent of these firms will go out of business within five years, but the remaining 60 percent will grow rapidly. The overwhelming majority will not incorporate, at least in their first year. But some will grow quite large quickly, accounting for as much as a fifth or more of total job creation.
Some 2 million Americans will file tax returns reporting first time self-employment earnings this year. But if this year is like others, these businesses will remain invisible to economists, the media and policymakers. The result is that policies that are intended to nurture job creation and bolster small businesses are poorly targeted and do not reach the self employed. What's more, these struggling businesses must contend with tax burdens that too often prevent them from growing quickly and boosting our economy.
That needs to change. It is time we switched our focus from the millionaires and established businesses to these real job creators.
We can start by recognizing the deeply unfair double burden they face when it comes to Social Security taxes. Even the smallest business owners are currently forced to pay both the employer and employee share if their net profit exceeds $400, though at that level they will be ineligible to receive any Social Security benefits. We can immediately show our support for the vital role grassroots entrepreneurship plays in our economy by raising the threshold for requiring Schedule C filing and payment of payroll taxes to at least the level at which filers will earn Social Security benefits -- $1,120 this year, indexed to inflation.
Second, we should focus payroll tax holidays on businesses in their first few years of life when they are at their most fertile and vulnerable, exempting them from employee and employer share the first year and employer share the second.
Third, we should encourage Americans to save for starting a business by making the Saver's Credit refundable, extending it to 50 million low-income working families, and allowing savers in retirement accounts to borrow against their savings for business creation in the same way we allow them to borrow from those accounts for higher education and homeownership. Studies have shown that these loans are paid back, and actually boost retirement nest-eggs through enhanced asset-building.
Finally, we should eliminate asset limits, which penalize entrepreneurs on public assistance if they earn too much by removing their benefits. It makes no sense to penalize low-income, poor, disabled, older and unemployed Americans from saving, starting businesses, going to school - the only paths that will likely free them from poverty.
If we did all of the above, the total cost, almost exclusively for tax cuts, would be a few billion dollars a year - less than 5 percent of the cost of the temporary payroll tax reduction currently in effect. The economic impact would dwarf the initial investment: as many as an additional million new and healthier businesses and jobs within a few years, many of them created by and for the unemployed and poor.
Is this a Republican or a Democratic, an Administration or Congressional agenda? It could be either or both. Today, it is neither. But it could well be the impetus for tomorrow's economy; an economy that recognizes that the true drivers of job growth are those who have the drive to create jobs for themselves.
Robert Friedman is the founder and board chair of CFED (Corporation for Enterprise Development). CFED expands economic opportunity by helping Americans start and grow businesses, go to college, own a home and save for their children's and own economic futures.