Small Business Failures and the 2017 Tax Cuts and Jobs Act

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As of late 2014, in nearly all economies, the Center for Economic Performance finds that the number of small businesses “represents more than 95% of all firms” (Criscuolo, et. al. 2014). These businesses are increasingly becoming vital to both the U.S. economy and domestic innovation. The U.S. Chamber Foundations finds that “innovation driven enterprises,” which include a wider universe of entrepreneurial firms, are an important piece of the puzzle for states wanting to foster a more innovative economy (2013). The Chamber Foundation, hence, notes that 50% of the United States’ GDP can be attributed solely to innovation. Unfortunately, using census data, the Brookings Institute reveals that the number of new businesses is down across the country and annually more businesses are dying than are being born (Litan, 2014). These declines are transparent across all industries, including tech.

Taxes are a significant concern of America’s small business community (National Small Business Association, 2015). Entrepreneurs face a complex and ever-changing web of federal, state, and local (and sometimes international) tax rules and burdens. Significant advances in data availability and econometric methods have spawned a large and growing body of literature on the effects of tax policies on small business activity. In December of 2017 the monumental Tax Cuts and Job Act was passed and its presence has since then played a large role in the economic climate of the United States affecting both small businesses and large businesses at large.

Although the policy’s name suggests that taxes were cut and jobs were created, where the growth happened was lopsided. Because of this act and its implications, some economists believe that small businesses have failed. There is another large factor that may play a large role in business failure, however. In an article detailing an interview with the Dalai Lama, Davis Abrahms notes that human nature naturally leans towards immediate rewards and pleasures. This short-term craving, according to the Dalai Lama, can be vastly self-destructing.

The most successful business owners go through long periods of slow growth and control when first starting their business while continuously aiming for their long term goals, however, this short sighted nature may be a primary reason for business failure (Source 4). The recent decrease in new firms and the short-sighted nature of humans raises the question: Will repealing the 2017 Tax Cuts and Jobs Acts reverse the upwards trend of business failure? Although governmental tax on small businesses is increasingly becoming common in the United States, the lack of proper administration and planning in small businesses may play just as large a role in their recent failure.

The Small Business Majority writes that the 2017 Tax Cuts and Jobs Acts increased the federal deficit by $1.9 trillion, “while dramatically lowering the rates for large corporations and the very wealthy with very little tax benefit for Main Street small business owners.” The problem is that the vast majority of the law’s funds benefited the “top dogs”; more specifically, the largest 2.6% of participating businesses. There are a few ways the act did so. The new law put a new limit on deductible business losses incurred by non-corporate taxpayers, made small reductions to income tax rates for most individual tax brackets, and significantly reduced the income tax rate for corporations.

The public pushback on the Act was quiet yet profound. An SMB poll found that 85% of small business owners and their affiliates felt as though the “tax code unfairly benefit[ed] large corporations over small businesses” (2017). In fact, the National Small Business Association explains that the “sheer complexity of the tax code is actually a more significant problem for America’s small businesses ” (National Small Business Association, 2015). Anti-state sentiment regarding tax codes are becoming increasingly prominent. In fact, in their annual State of Entrepreneurship Address the Kauffman Foundation found that “Seventy-nine percent of startup entrepreneurs say they had no support from the government to launch their companies” (Buchanan, 2018).

Similarly the Small Business Majority found that ⅓ of small businesses feel as though the government only cares about large corporations. The combination of Tax Acts that disproportionately benefit these same rich and large businesses as well as a deficit of policies with substantial impacts largely contributes to these concerns. It’s increasingly becoming clear that small businesses not only want the same opportunities as large corporations but a holistically fair tax system.

From the government’s perspective large corporations have moved the U.S. forward in the past so they should be prioritized, however, this mindset has created multiple industrial monopolies in the United States. The Harvard Business Review in 2009 explains how the United States has gradually loosened regulations on large corporations over time because of their impact on the public. That and the political ties these corporations have lead the HBR to write that “big businesses may capture the lion’s share of the subsidized loans, loan guarantees, tax breaks, new property rights, and other incentives” (2209). By using their position to disproportionately output tax policies big businesses have disproportionately hurt smaller and younger firms. It is this imbalance that has encouraged Victor Hwang, Vice President of the Kauffman Foundation to argue that it is imperative that the “government needs to listen more to entrepreneurs” in order to eliminate present barriers for small firms.

The problem is that small firms are in reality uber critical to the United States economy. First, small businesses create more jobs than any other party. Haltiqiger from the MIT Press Journal calculates that young firms account for nearly all of the net yearly jobs created (2013). Dane Stangler & Jordan BellMasterson of the Kaufman Foundation quantify that small firms account for nearly 1.5 million new jobs created yearly (2013). The second thing that small businesses contribute to is innovation. In a meta-analysis, the University of Chicago concluded that small firms also contribute to economic dynamism by injecting competition into markets and consequently creating innovation (200). Despite this 60 percent of small firms believe that the government doesn’t care about businesses like theirs. Political favoritism has arguably gone too far.

Repealing the Tax Cuts and Job Act does not, however, fix the inherent problems causing the failing small business world. The definition of the word failure is critical to subjectively analysing what hurts a small business or forces it to close. On net, economic factors such as unfavorable tax policies are associated with “between 30% and 50% of small business failures” (Everett and Watson, 2020). This accounts for a substantially large amount of the failures, yet, not all. Without addressing the other largest factor to failure repealing tax acts will only go so far.

The prevailing theory on why small firms fail is because of poor management. Jessie Hagen of U.S. Bank found that the number one reason why small businesses tend to fail with an 82% prevalence rating is “poor cash flow management skills/poor understanding of cash flow” (2019). In other words, in 82% of failed firms, poor management trumped lack of money and economic bias. In an interaction with the Dalai Lama, writer Douglas Abrahms explains the intrinsic nature that makes poor management the number one reason for business failure. According to the Dalai Lama most people are drawn to the advent of short-term satisfaction at the loss of long-term happiness (Source 4). In a business setting that means a lot of things but it can be boiled down to maximizing short term profits and bonuses over long term goals. The monk explains that “while temporary en­joyment can come through our senses, it is inevitably fleeting and not the source of enduring satisfaction.”

The same holds true to small businesses. Those that lose focus of what is important and indulge in the aforementioned short-term profits tend to fail. According to the writer, the monks believe that there is a fine “boundary be­tween enjoyment and greed.” The UGA foundation writes that what prevents people from innovating is not so much a lack of resources as poor time management, but the fact that ‘people are not efficient with their time, and they don’t have the mental grit to say, ‘No, I’m going to be disciplined and spend an hour each night chipping away at this project’” (2019). This mindset shift makes the most difference in the world of small businesses.

The obvious answer to the problem is that small businesses owners need to manage themselves better, however, not only is this ambiguous but it is also counter-intuitive. Most businesses are already under an external-blaming loci that prevents them from recognizing that the largest player in their success or failure is themselves. Psychologist Rick Wilson explains in his 2019 research paper that the blame shifting -the tendency to blame someone else or a third party for failure- is not only engrained in both human nature and culture, but that the loci is becoming ever-so-present with each new generation. This loci can explain why a majority of small businesses would point to competition and bad timing as the reasons for their failure versus their own time management.

The solution to get more small businesses to succeed is simply planning. University of Boiling Business Professor XXX carried out a statistical inferential test to find the relationship between written business plans and the failure of small businesses in the United States. In his 2019 paper he concluded that very little small businesses engage in planning. More importantly, he found that those who did plan had much higher rates of success than the firms that did not. The reason why this works can be linked back to the principles of the Dalai Lama. Humans intrinsically seek out short term fixes, however, planning does two things to stop this. First is that is defines a focus.

Gupta from the PMC writes that planning is strategic in that it defines “the direction and scope of an individual over the long-term.” Second planning usually occurs when people map out their “long-term desired outcomes.” Being constantly reminded of these long-term goals reminds the business owner of the more important and satisfying reward that awaits them at the end of the rainbow. This short-circuits the beckons of short-term cravings- i.e. increasing individual wages, increasing business profits at the expense of the businesses funds, and using the business funds for personal affairs.

There is another problem with just repealing the Tax Cuts and Jobs Act: repealing the act doesn’t necessarily move the small business economy forward. In order for that two specific actions could make a substantial difference. The first change needed to move small firms forward instead of backwards is an expansion of both state and federal Earned Income Tax (EITC) programs directed at small firms by allowing self-employed entrepreneurs to buy into the programs. This is a step that is already happening but not on a large enough scale. The best example as of right now is California- California has recently raised EITC income eligibility limits so that more workers living at or near poverty levels can receive the credit (Anderso, 2017).

The Tax Policy Center explains that EITC usually works by providing “substantial support to low- and moderate-income working parents” (Tax Policy Center, 2020). Right now welfare only targets the poorest of the poor (Ratcliffe, 2019). This expansion acts as a safety net for the small business owners with families to support those that live in those economic grey areas. Another very tangible change that could happen at the federal level is extending the deadline for the New Markets Tax Credit bill. This recent 2019 tax credit bill has brought in more than $60 billion dollars to the private sector funding.

The bill works by building businesses “in economically distressed communities across the United States” (NMTCC, 2020) The major success of the program has been recognized and Congress has extended its deadline to fall of 2020. It is an example of tax policies that indiscriminately work for both small firms and the underfunded alike. By continually extending this program or making it permanent we can exacerbate this equilibrium.

Cite this paper

Small Business Failures and the 2017 Tax Cuts and Jobs Act. (2021, Aug 23). Retrieved from https://samploon.com/small-business-failures-and-the-2017-tax-cuts-and-jobs-act/

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