How Small Business Tax Cuts Can Help the Economy

Economists often cite small business tax cuts as a way to stimulate economic growth. But how does that work? The following information looks at what causes an economic slowdown and the effect small business tax cuts can have on turning it around.

Downward Spiral

The economy runs in cycles. In an upswing, people borrow and spend freely. Increased demand raises prices. However, prices eventually rise to a level that consumers begin to cut back on spending. Before that point is reached, businesses have geared up for the increased demand. Workers are hired. Inventories are high.

Then as consumer spending slows, businesses need fewer workers because sales decline and inventories are sufficient to meet demand. Lay offs result, which creates an even greater slowdown in consumer spending. That results in more layoffs, and the downward spiral follows.

Turning It Around

Why is any action needed? Because as the downward cycle bottoms out, businesses are reluctant to start hiring. Stimulating action by businesses can help turn the spiral around more quickly. But economists disagree on the best way to turn it around. Some say ride it out. Others say the government should stimulate the economy by spending to create jobs. Many believe tax cuts - small business tax cuts in particular - are the way to go.

Small business tax cuts can have a significant impact because many so-called "small" businesses are not so small. The Small Business Administration defines a small business as having between 100 and 500 employees, depending on the industry. Small businesses can have revenues of up to $33.5 million annually, again, depending on the industry.

As an example of the impact, if small business payroll taxes are cut, it becomes less expensive - and therefore less risky - for businesses to hire workers. Once hiring starts, there are more consumers who can spend. This creates demand for more goods, which creates demand for more employees. An upward spiral starts.

Predictability

But why is that different than government spending to stimulate jobs? A tax cut is typically a longer-term solution. The key for such small business tax cuts is that a business can count on it. There is no worry that the government won't fund another round of stimulus spending. Small business owners are more likely to begin hiring if they believe the incentive to hire is permanent.

Widespread Benefit

Similarly, with government spending, there is only so much money to go around and only so many industries that can be affected. With a small business tax cut, every business in every industry in every part of the country is impacted.

The Importance of Confidence

The business strategy of small business tax cuts is clear. A tax cut gives any business anywhere an incentive to get growing again. But don’t underestimate the power of confidence. As small business tax cuts impact hiring, unemployment numbers drop and consumer confidence rises. Economic cycles are measured in facts and figures, but consumers spend when they’re confident.

Key words: small business tax cuts