New Research Weakens Case for Small Business Tax Relief

... Economists John Haltiwanger, Ron Jarmin, and Javier Miranda... observe that... [y]oung firms are likely to grow much more rapidly than mature firms. However, young firms are also much more likely to go out of business than mature firms. Overall, young firms' job creation and destruction are far more volatile than mature firms'. It is this creative destruction that keeps the economy moving toward higher productivity.

That volatility creates all sorts of potential pitfalls for researchers. Most importantly, it has allowed perpetuation of the myth that promotion of small business is synonymous with job creation.... [These economists] find that it is the youth of small firms, not their size per se, that is creating jobs. In fact, their findings show that mature small firms have a negative effect on job creation...

That is bad news for Republicans who use small businesses as the poster children for prevention of high-bracket rate increases. Even if tax cuts for high-bracket taxpayers could be targeted to small businesses, which they can't, they would still be ineffective because they are not targeted to the subset of small businesses that actually are responsible for creating jobs...

In another recent paper from the National Bureau of Economic Research, University of Chicago economists Erik Hurst and Benjamin Pugsley... found that once established, most small firms do not grow or are not expected to grow. Moreover, many of them do not want to grow. One reason for this is that many small business owners got into the business for themselves for non-pecuniary benefits such as wanting a flexible schedule or to be their own boss.

... Hurst and Pugsley point out that firms that seek venture capital funding are much more likely to grow than other small firms... At the federal level in the United States, there has been advantageous capital gains treatment for qualified small business stock since 1993 under section 1202 of the code. But venture capitalists complain that the benefits are too stingy and the rules for qualifying are too complex and restrictive...

President Obama and several members of Congress have proposed amending section 1202 to remove restrictions and expand benefits. And there also have been proposals for federal tax credits for venture capital investment.

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View TaxAnalysts Martin Sullivan's opinion in its entirety on TAX.com.

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