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Janemarie Mulvey, Ph.D. Chief Economist Office of Advocacy U.S. Small Business Administration Impact of Fiscal Policies on Small Business INFORUM Annual Policy Meeting December 12, 2013 1
Janemarie Mulvey, Ph.D. Chief Economist
Office of Advocacy U.S. Small Business
Administration
Impact of Fiscal Policies on Small Business
INFORUM Annual Policy Meeting December 12, 2013 1
Office of Advocacy
• Created by Congress in 1976, the Office of Advocacy of the U.S. Small Business Administration (SBA) is an independent voice for small business within the federal government.
• Our mission is to serve as a voice for small businesses regarding: – Federal Regulation – Economic Research
• Regulation: Identify solutions or alternatives with the respective federal agency to minimize potential burden and unintended consequences on small businesses.
2
Office of Economic Research
• Examine the role of small business in the American economy;
• Analyze impact of tax policy on small businesses; • Explore access to capital issues for small business; • Identify characteristics and potential barriers for small
business owners, including women, minorities and veteran owned entities; and
• Identify factors leading to small business successes and failures.
3
Overview of Fiscal Policy Impacts
• Small Business and the Economy • Sequestration
– Deficits vs. Debt – Discretionary vs. Mandatory Targets – Impact on Economic Activity on Small Businesses
• Tax Reform – Options and Obstacles – Small Business Tax Expenditures
4
Small Businesses in the US
• 99.7 % of U.S. firms with <500 employees
• 64 % of the net new jobs in the private sector
• 46 % of private-sector output
• 98 % of firms exporting goods
• 33 % of exporting value
5
Employment Change by Firms Size As of 2013 Q1
6 Source: Bureau of Labor Statistics, Business Employment Dynamics.
Growth in Number of Small Firms Increasing as of 2013 Q1
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
<20 500+ 20-499
Number of Employees
7 Source: Bureau of Labor Statistics, Business Employment Dynamics
Challenges of Fiscal Policy
Sequester/ Shutdown(s)
Potential Tax Reform
8
Federal Budget in Perspective: Deficits vs. Debt
Billions of Dollars Percentage of GDP
Actual 2009
Actual 2013
Projected 2015
Actual 2009
Actual 2013
Projected 2015
Total Revenues 2,105 2,813 3,399 14.6 17.5 19.3
Total Outlays 3,518 3,455 3,777 24.4 21.5 21.4
Deficit -1,417 -642 -378 -9.8 -4.1 -2.1
Debt 7,545 12,036 13,156 54.1 75.1 74.6
Sources of Outlays
Discretionary 1,237 1,213 1,187 8.9 7.6 6.7
Mandatory 2,281 2,020 2,326 16.4 12.6 13.2
Net Interest 187 223 264 1.3 1.4 1.5
Source: Congressional Budget Office
9
10
Sequestration: Across-the-Board and Only Affects Discretionary Spending • Budget Control Act of
2011 implemented discretionary spending caps
• American Taxpayer Relief Act of 2012 modified caps
• About $1 trillion of across the board cuts to discretionary spending over 10 years ($100 billion a year)
0 100 200 300 400 500 600 700 800 900
2012
20
13
2014
20
15
2016
20
17
2018
20
19
2020
20
21
Billi
ons
of $
Discretionary Spending Caps
Security/Defense Category Nonsecurity/Non-Defense
11 Source: CBO, current law. Does not include Ryan-Murray Budget Proposal.
Discretionary Spending Not the Key Source of Future Debt
12
Economic Impact of Sequester: Dampen the Demand for SB Products
Development of Product
Production of Goods or Services
Bring to Market
Entrepreneurship
Supply
Demand
13
Growth in Economy Improving But….
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
1997
19
98
1999
20
00
2001
20
02
2003
20
04
2005
20
06
2007
20
08
2009
20
10Q
1 20
10Q
2 20
10Q
3 20
10Q
4 20
11Q
1 20
11Q
2 20
11Q
3 20
11Q
4 20
12Q
1 20
12Q
2 20
12Q
3 20
12Q
4 20
13Q
1 20
13Q
2 20
13Q
3
Growth in Real GDP
Source: Bureau of Economic Analysis
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Government Spending and Inventories Distorting Trend
2012 Q4 2013 Q1 2013 Q2 2013 Q3 S&L -0.12% -0.14% 0.05% 0.19% Federal -1.19% -0.58% -0.12% -0.10% Net Exports 0.68% -0.28% -0.07% 0.07% Chg. In Inventories -2.00% 0.93% 0.41% 1.68% Fixed Investment 1.63% -0.23% 0.96% 0.81% Consumption 1.13% 1.54% 1.24% 0.96%
-4.00% -3.00% -2.00% -1.00% 0.00% 1.00% 2.00% 3.00% 4.00% 5.00%
Contributions to Percent Change in Real GDP
0.1% Real GDP Growth Rate 1.1% 2.5% 3.6% 15
Unemployment Rate is Declining But..
16
Source: Bureau of Labor Statistics
Share of Long-Term Unemployed Is Still High by Historical Standards
Source: Bureau of Labor Statistics.
0
10
20
30
40
50
2013200820031998199319881983
Percent
Note: Long-term unemployed defined as being unemployed 6 months or longer.
The Federal Reserve to the Rescue • Quantitative Easing holding down interest rates to
historical lows – Increasing demand in interest sensitive durables and
housing which help small business • But is it sustainable?
– Fed purchased more than $4 trillion in government securities
– When mature in 2016 and beyond, how will federal government pay back w/ budget targets still in effect.
• $215 billion in 2016 • $185 billion in 2017 • $342 billion in 2018
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Federal Reserve Holds Down Interest Rates to Historical Lows
0
2
4
6
8
10
12
14
16
10-Year Treasury Yield
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Jobs in Interest Sensitive Small Business Dominated Industries Grow
Wholesale Electronic …
Accom. And Food Services
Arts, Entertainment and Rec.
Engineered Construction
Personal and Laundry
Repair and Maintenance
Durable Wholesale Trade
Nondurable Wholesale Trade
Resid. Const.
Nonresid. Const.
% Change in Employment Since Recovery Began
0.0% 1.0% 2.0% 3.0% 4.0%
Wholesale Elec. Mkts Agents and Brokers
Automobile Dealers
Resid.Const.
Nonresid. Const.
% Change Since Jan. 1, 2013 Interest Sensitive
Industries
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Tax Reform and Implications for Small Businesses Options: • Individual and/or Corporate Focus • Budget neutral or raise revenues • Targeted approach or comprehensive Obstacles: • Special interests • Politics and 2014 elections
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Individual Tax Expenditures Provide Larger Revenue Target
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Tax Expenditures for Small Business Pass-Through to Individual Tax Return
C Corporations 15%
S Corporations 37%
Partnerships 36%
Sole Proprietorships
(Non-Farm) 12%
Tax Expenditures by Small Business Entity Type, 2013
Source: John O’Hare, Mary Schmitt, Judy Xanthopoulos, “Measuring the Benefit of Federal Tax Expenditures Used by Small Business,” Quantria Strategies, November 2013.
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Health Premiums and Pensions Largest Individual Tax Expenditure
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Pension and Health Also Largest Tax Expenditures For Small Business
26%
13%
20%
0% 0%
5%
10%
15%
20%
25%
30%
Retirement Plan (Keogh Plans) Deduction for Health and LTC Insurance Premiums by the Self-
Employed
Tax Expenditures by Share of Total, 2013
Small Business Large Business
Source: John O’Hare, Mary Schmitt, Judy Xanthopoulos, “Measuring the Benefit of Federal Tax Expenditures Used by Small Business,” Quantria Strategies, November 2013. 25
Other Tax Expenditures Important to Small Businesses
• Encourage U.S. domestic manufacturing and investment – IRC Sect. 199
• Promote investment by small businesses (expanded following great recession) – IRC Sect. 179
• Not important to small business – Deferral of active income of
controlled foreign corporations
0%
10%
9%
35%
8%
1%
0% 10% 20% 30% 40%
Deferral of Active Income of
Controlled Foreign …
Deduction for Income Attributable
to Domestic …
Expensing under Sect. 179 of
Depreciable …
Tax Expenditure Share of Total, 2013
Large Business Small Business
Source: John O’Hare, Mary Schmitt, Judy Xanthopoulos, “Measuring the Benefit of Federal Tax Expenditures Used by Small Business,” Quantria Strategies, November 2013. 26
Conclusion
• Sequester doing more harm than good – Does not address real source of growing debt – Timing off and dampens economic activity
• Tax Reform may provide option for revenues – Must be targeted – Careful about unintended consequences
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