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A recent U.S. survey found small business owners cared twice as much about obtaining operating licences than they did taxes. (JIM YOUNG/JIM YOUNG/REUTERS)
A recent U.S. survey found small business owners cared twice as much about obtaining operating licences than they did taxes. (JIM YOUNG/JIM YOUNG/REUTERS)

Economy Lab

Red tape worse than taxes: U.S. small business Add to ...

Smaller businesses in the United States were feeling a bit better in April. The National Federation of Independent Business’s monthly confidence index increased a couple of notches to 94.5, reversing a decline in March.

The March result now looks like an aberration. With the exception of last month, the index has been climbing steadily since September. That trend should continue because gasoline prices are lower and credit conditions are easier. “A clear step forward with more to come,” economist Ian Shepherdson said of the small business index Tuesday.

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As with every U.S. economic indicator these days, the optimistic reading of the NFIB’s latest survey of a sample of its members is relative. By historical standards, a reading of 94.5 is weak. When the economy is doing well, the index comes above 100. According to Mr. Shepherdson, the index must exceed 95 to signal overall growth among smaller businesses.

So what would it take to get the owners of these companies to boost output?

Higher demand, obviously. But that is going to require some kind of stimulus. The most popular one in Washington is a tax cut: Everyone in this town talks about reducing the tax burden of smaller companies. (If not for election-year politics, they might actually do it.) However, ask small businesses, and taxes don’t appear to rank as their primary concern.

As with every U.S. economic indicator these days, the optimistic reading of the NFIB’s latest survey of a sample of its members is relative. By historical standards, a reading of 94.5 is weak. When the economy is doing well, the index comes above 100. According to Mr. Shepherdson, the index must exceed 95 to signal overall growth among smaller businesses.

So what would it take to get the owners of these companies to boost output?

Higher demand, obviously. But that is going to require some kind of stimulus. The most popular one in Washington is a tax cut: Everyone in this town talks about reducing the tax burden of smaller companies. (If not for election-year politics, they might actually do it.) However, ask small businesses, and taxes don’t appear to rank as their primary concern.

The NFIB asks its members each month to declare their “single most important problem.” In April, 18 per cent said taxes, down from 19 per cent a year ago. Poor sales were identified by 19 per cent of respondents, which is a notable improvement from a year earlier when 25 per cent said a lack of demand was their biggest concern. The biggest single concern of business owners is one policy makers can address with little cost to the treasury: Twenty per cent identified “government regulations and red tape” as the biggest problem, up from 17 per cent in April 2011.

There’s more evidence that taxes are a bigger concern for politicians than for executives in Thumbtack.com’s inaugural ranking of small-business friendliness. The San Francisco-based company, which matches service providers with potential clients, collected responses from more than 6,000 small-business owners, drawn from Thumbtack’s own client base of more than 250,000. Working with the Kauffman Foundation the goal is to determine the U.S. states and cities where the owners of smaller companies are the most content. The survey hold the promise of identifying best practices by highlighting policies that work.

Sander Daniels, co-founder of Thumbtack, said the biggest surprise in the initial survey was how little correlation there was between taxes and overall “small-business friendliness.” Respondents cared twice as much about obtaining operating licences than they did taxes, Mr. Daniels said. But the best predictor of whether a state or municipality would score highly was whether respondents were aware of government-sponsored training programs for small businesses. (Those who were aware of such programs gave overall business friendliness scores that were 10 per cent higher than those who were not.) Smaller companies represent about 50 per cent of U.S. gross domestic product. “Until the small-firm sector recovers properly, the economy as a whole cannot hit the sustained 3-per-cent-plus growth everyone wants to see,” Mr. Shepherdson said.

That may require a broader discussion about economic policy.

It’s attractive to put taxes at the centre of every discussion about economic policy, especially for politicians. The debate about tax rates allows for simple narratives: Cutting taxes leaves more money in your pocket; requiring the most fortunate to pay more makes for a more egalitarian society. And so on. But if the goal is to encourage smaller companies to expand and hire, the policy debate will have to expand beyond taxes. And until it does, the U.S. economy will continue to lag.

Follow on Twitter: @CarmichaelKevin

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