In an October 23, 2011, op-ed in The New York Times, Jared Bernstein neatly laid out some earthshaking facts. The former economic adviser to Vice President Joe Biden summarized recent research that says small business is not the engine of job creation that politicians and the press repeatedly claim it to be. "To the extent that size matters at all for job growth, it's really about new companies that start small," he wrote.
Underlying Bernstein's claims is the work of current and former Census Bureau economists who found "no systematic relationship between net [employment] growth and firm size." (See John Haltiwanger, Ron Jarmin, and Javier Miranda, "Who Creates Jobs? Small vs. Large vs. Young," National Bureau of Economic Research working paper 16300, Aug. 2010.)
The Bush tax cuts are scheduled to expire at the end of 2012. Whether they should be extended for high-income taxpayers will be a hotly debated issue in Congress and on the campaign trail. Central to Republican support for across-the-board extension is the claimed detrimental effect high-bracket tax increases will have on small businesses and job creation. The research cited by Bernstein blows the Republican argument out of the water.
In the past, economists did not have a lot of data on firm age. Start-ups, young firms, and mature firms were all lumped together. So when economists looked at the data, they could see that small firms had higher rates of job creation than large firms, but they could not see beyond that. But over the last decade, the Census Bureau has developed a new data set it calls Business Dynamics Statistics. These data allow economists for the first time to simultaneously examine firm size, firm age, and employment growth on an economywide basis. It is analysis using this new data set that has put the nail in the coffin of the conventional wisdom. Youth, not smallness, is the key to job creation. Start-ups, not mature firms, are the engines of job growth. Policies that provide incentives to all small businesses are poorly targeted because only start-up firms are net job creators. Mature small firms are net job losers.
View TaxAnalysts' Martin Sullivan's opinion in its entirety on TAX.com.
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