Submitted by Charles Hugh Smith from Of Two Minds
You Want Small Business to Start Hiring? Here's What To Do
To incentivize small business, we have to fix the structural imbalances in the U.S. economy.
Everyone wants to know how the Central State can "help" small businesses so they will start hiring again. The answer is simple: fix the structural imbalances in the U.S. economy and start favoring real production over financial speculation.
Please note the question at hand is "what should be done," not "what can be done politically." Politically, everything I propose here is impossible. The Status Quo's stupendous power and share of the national wealth is based on preserving those structural imbalances. The last thing the toadies and parasites in Washington want is to upend the structural imbalances which feed their Masters, the Financial Power Elites and crony-Capitalist cartels.
The great value in asking what should be done is that it lays out for all to see the vast gulf between the present doomed system and where the nation should be heading.
To fix anything as systemic as small business, you need to begin with an integrated understanding of the system. This "to do" list is based on my Survival+ critique.
The Status Quo wants everyone to believe that all that ails small business can be fixed with tiny tweaks, such as increasing the depreciation rate on equipment. Those kinds of solutions are about as effective as band-aids over cancer.
If we start by asking cui bono, to whose benefit, then we discern the system is currently ordered to incentivize speculation by those Financial Elites who effectively control the institutions nominally under the control of the Central State: the Federal Reserve, the regulatory agencies, Congress, etc. Given their influence over the machinery of governance, then their private losses are simply transferred to the taxpaying public, which then borrows trillions of dollars on the bond market--and pays ever more interest on that rising debt--to cover the losses of the Financial Elites.
The conventional scheme of things is to distinguish between corporations, small business and employees. I would make a different distinction: between speculative financial churning and skimming and production of tangible goods and real-world services.
I would further make a distinction between domestic and global corporations. Global corporations are akin to empires, while domestic corporations are akin to nation-states. Global corporations now concentrate so much capital that they sit astride nation-states, moving capital and assets around to suit their own goals, and buying political power where doing so is a "wise investment."
With that general backdrop, here's my list of what needs to be done to incentivize small business formation and hiring:
1. Restore sound money. How can any business flourish when its money is being depreciated? Global companies can hedge against this "hidden tax" but small business (and wage earners) cannot.
2. Raise the cost of borrowing money and incentivize capital formation. If the Million-Price Project pegs inflation at 3%, then savings and checking accounts should pay 7%--a 4% real return--and it should cost 10% to borrow money.
Zero interest rate money available to Wall Street and the Too Big to Fail banks only encourages speculation and misallocation of capital on a grand scale. If an investment can't justify a 10% cost of borrowing, it's a poor investment and it shouldn't be made.
3. Offer corporations a choice: since they're legally considered "persons" now, then they have a simple choice:
A. Pay the individual "persons" tax rate on all income, and have all corporate-specific tax breaks stripped away, or
B. Renounce their Supreme Court-granted rights to "personhood" and pay 0% income tax on all non-financial-related income.
Right now most global U.S.-based corporations pay around 3% effective tax rates because they game the system (which they own/influence). So eliminating the corporate tax rate for all non-financial-related income would wipe out the hidden "tax" of paying lawyers and lobbyists to game the system. It would also make the U.S. attractive globally.
Many people want the clock to be turned back to when corporations paid significant Federal taxes. Since capital and assets can be shifted anywhere now, this is wishful thinking. Better to eliminate the wasted energy gaming the system and lower the tax rate on productive capital to zero, and tax individuals who receive income from the corporations--dividends, bond yields, salaries and bonuses, stock options, etc.
There is a caveat, of course:
4. Set the income tax on all finance-derived income for individuals, small business and corporations at 50% above the first $100,000, and 75% above $1 million. All income gained from churning, skimming, selling of "financial innovations," trading, derivatives, loaning money, any and all sources of income derived from financial sources, is taxed at 50% above the first $100,000 and 75% above $1 million.
If an individual is able to generate $2 million in short-term churning, then they can afford to pay $1 million in tax. If a hedge fund skims $100 million, then they can afford to pay $75 million in tax.
There is an alternative: quit skimming and start investing in productive assets.
the $100,000 set-aside enables small-business money managers and the like to make a living by paying the same tax rates as everyone else. But once they start making more than $100,000 annually, then they pay 50% tax on all finance-derived income.
The point here is to provide a disincentive to speculation and financialization and an incentive to production of tangible goods and real-world services. Once an economy has been incentivized in favor of financial speculation and gaming at the expense of producing real wealth, it is effectively doomed.
5. Set the long-term capital gains holding period at three years. All finance-derived income would be taxed at 50%, but truly long-term gains--three years or more--would be taxed at 25%. That incentivizes actual investments in productive assets as opposed to short-term (in high-frequency trading, mere seconds) churn and skimming.
6. Lower the Federal tax rate for sole proprietor/partnership enterprises to 7.65% up to $50,000 annually. Right now, the sole proprietor pays 15.3% self-employment tax and 15% regular income tax (on the first $34,000), an effective rate of 30%. The wage earner pays 7.65% plus the 15%. This disparity doesn't exactly encourage enterprise. Lowering the effective tax rate on the first $50,000 (the average income in the U.S. is $49,777 annually) to that of employees would level the playing field for those trying to earn their living as sole proprietors.
7. Fix the broken healthcare (a.k.a. sickcare) system in the U.S. How can any small business thrive when sickcare siphons off 17% of the U.S. GDP, compared to 8% in other developed nations such as France, Japan and Australia?
I have proposed two ways to fix the system--both are acceptable in my view, which I have outlined here many times:
A. Eliminate the entire system of private insurance, Medicaid and Medicare. Everyone pays cash for all healthcare. This is effectively a reset to 1965. Please note the U.S. was a developed nation in 1965 and that by some metrics, was actually healthier then than we are now. Longevity has barely budged. In other words, a non-spin analysis would find we're getting precious little for 17% of our GDP.
Such a reset would eliminate all the corruption, fraud, skimming and Central State- cartel controls that have created a monster which delivers decreasing health and costs that are double that of our global competitors.
B. Institute a national system based on the Veterans Administration: the entire system is opt-in (you don't have to go to the VA, you are free to pay cash and go wherever you want) and owned lock, stock and barrel by the Central State (Federal government).
The VA is not perfect--what large bureaucracy is?--but it has provided innovative solutions to large-scale care. Yes, there are lines, and yes there are limitations, but the system costs a fraction of the cartel-crony Capitalist quasi-private system that costs 17% of GDP. Since doctors are employees of the VA, there is no crushing burden of "defensive medicine" and malpractice, nor are there opportunities for gaming the system for millions of dollars, for example, owning the MRI machines and giving every patient an MRI test at your own lab.
8. Streamline Federal regulations down to one page (two sides) for all enterprises except nuclear materials or equivalent. Central State fiefdoms and their Cartel-crony Capitalist partners love 1,000-page regulatory schemes because they are extremely effective "moats" to small business competition.
The vast majority of businesses could be regulated by two pages of common-sense, straightforward regulations--two sides of one sheet of paper.
This would mean paring the armies of bureaucrats who are currently incentivized to increase the regulatory load on small business because more regulation is highly effective job security.
lagniappe/bonus reform: Impose a Federal regulation that caps any form of local government/state annual business license or business tax at 10 times the hourly minimum wage (e.g. 10 X $8.65 = $86.50).
Local government has taken the implicit point of view that small business is a treasure trove of ill-gotten wealth and a cash cow with endless reserves of "fat" to be taxed. If you want to encourage small business to expand and hire people, then you can't saddle them with thousands of dollars a year in junk fees, the most pernicious of which is the local "business license fee" that is based on a percentage of gross revenues: even if your business is losing money and has no net income, you still have to pay a tax based on gross revenues.
Until you close down, of course, which is what the system currently incentivizes.