Small Businesses – Stop Worshiping Them?

Doesn’t a lot of this jawboning about job creation make your brain explode?

I’ve never read articles by Rex Nutting before, who writes for MarketWatch on the WSJ Digital network … but a banker friend of mine referred me to his “Time to stop worshiping small businesses” article.

I’m not sure where Rex gets his information but his conclusions about the limited job creation value of small businesses is generally unsupported. After arguing, in Clintonesqe fashion about “it depends on how small the definition of small is”, he goes on to claim that while “small businesses do create a lot of jobs, but they also destroy a lot.” Citing a Census Bureau study, he claims that “once they pass their first birthday, small companies, on average, lose more jobs than they create. Many fail within years.”

[pullquote]Who says tax rates don’t matter to job creation?[/pullquote]

A recent study by the Ewing Kaufman Foundation reported an entirely different result, concluding that “80% of the jobs created in the first year are still here after 5 years.” There’s not enough detail available to comprehensively compare these disparate reports, but to debunk the value of SMB job creation requires a little more factual support from Nutting.

He also claims that tax rates don’t matter and that the tax on SMB business owners is entirely irrelevant to their hiring plans. While I agree that the immediate decision to hire is related to the expected ROI on the costs/benefit side, Nutting fails to recognize that the long term investment capability of all businesses is driven, in significant part, by the after tax cash available for future investment. To the extent that Cash Flow before Financing (“Free Cash Flow”), which is calculated on an after-tax basis, is impacted by increasing tax rates, there will clearly be less cash available for future investment. Moreover, the tax rate has a powerful effect on the hiring ROI itself, since higher taxes means that to justify the new hire requires a higher ROI threshold.

Provocative thoughts … but generally “good for Nutting” ideas that fail to hit the real target … the prevailing uncertainty and unpredictability that’s killing American business and job growth.

What do you think is stalling job growth? Is it credit? Tax rates? Uncertainty?

This Post Has 2 Comments

  1. business for slae

    this very informative, thanks for sharing, but is that study true, does this mean the largest amount of time a small business could be open would be 5 years ??

  2. Lary

    No, it just means that most of the jobs created by SMBs are still around after 5 years, supporting the notion that small businesses DO create jobs.

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