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Small business Q&A on taxes, fiscal cliff

NEW YORK - Dane Stangler has never owned a small business, and doesn't expect to ever own one. But he's in a position to understand the challenges facing people who own small companies.

Mr. Stangler is the director of the Research & Policy department at the Ewing Marion Kaufmann Foundation. His job is to help the foundation determine how it can encourage and mentor entrepreneurs. His department conducts research and surveys and analyzes studies done by researchers at other institutions. So he is familiar with the issues that entrepreneurs and small businesses face.

The foundation draws what Mr. Stangler calls a blurry distinction between entrepreneurs, the people who start companies or run young enterprises, and small businesses, which Kauffman sees as companies that have made it past their early years. Some small-business issues, like income taxes, aren't a problem for entrepreneurs whose businesses may not be making a profit, Mr. Stangler notes. But small companies of all sizes face some of the same problems: the weak economy and the prospect of federal budget cuts.

Mr. Stangler spoke recently with The Associated Press as Congress was haggling about the "fiscal cliff," the combination of billions of dollars in tax increases and budget cuts scheduled to go into effect Jan. 1. Economists have warned that if Congress doesn't prevent those tax increases and budget cuts from going into effect, the country will be at risk of going into a recession. And it's believed that small businesses would suffer the most.

Here are excerpts from the interview with Mr. Stangler, edited for clarity and brevity:

Q: How important is government policy for small-business owners?

A: If you are a business owner, your primary concerns probably have to do with your business. Policy impacts at the margins but I still think that for most entrepreneurs and for most business owners, their top concerns are still customer demand, because consumer spending is still making its way back. Households are still deleveraging. Policy is very important, but getting sales, getting customers, running your business, dealing with employees probably still dominate the daily thinking of a lot of business owners. Policy obviously impacts that, but not always centrally.

When you do get into policy concerns that either are, could be, or should be at the top of a business owner's mind, I think tax policy is probably the biggest one because tax rates are about to go up and that's important because so many small business are taxed at personal income rates - like S corporations and sole proprietors.

There's a lot of disagreement in the literature, both academic and nonacademic research, about the impact of tax rates on business owners - how many businesses are actually subject to those rising individual tax rates. … We worked with a company called Thumbtack.com on a survey of 6,000 businesses and individuals. One of the things our researchers dove into was the impact of taxes. And we released a paper in October that said it's not necessarily the level of taxes (that's the problem). That doesn't matter, because no one expects to pay no tax. It's the sheer complexity of dealing with taxes. So it's not necessarily the rate, it's just the burden, the time burden, the money burden of compliance, and not knowing all the different kinds of taxes you're subject to. Depending on the type of business, you're going to have local taxes, municipal taxes, county fees, state, federal. Our tax code is just a continuing full employment act for accountants and lawyers. It obviously adds something to the economy, but it's also itself a tax on people who are trying to create other forms of wealth.

Q: What is the biggest issue with the "fiscal cliff"?

A: The "fiscal cliff" is not only about the tax code. It's just the uncertainty. I know that's a catchall term that everyone uses, but it's for real this time. Everyone always says businesses hate to deal with uncertainty, and it kind of has a hollow ring to it because just the nature of running a business, you're always dealing with uncertainty. But at times like this, when politicians have manufactured a crisis, this is serious uncertainty, because no one knows how it's going to change. If we do go over the cliff, we're sort of going to get whipsawed because the Internal Revenue Service is preparing for the government going over the cliff, putting in place all the new tax forms, and then, six weeks later, when they reach a deal, we're going back to the way things were. That uncertainty and that expectation of being whipsawed back or forth is really a serious issue, whether or not you're worried about higher rates. It's just that hassle of dealing with all this.

Q: Is there any long-term damage done by this kind of situation to small business?

A: There are probably very few people, especially among the community of entrepreneurs and business owners and potential entrepreneurs now who would bet against the long-term strength of the U.S. economy. We've obviously got challenges. But there's very few people who would bet against the U.S. in the long term. That is borne out by the fact that we continue to see a strong level of entrepreneurial activity - people starting business. That act is itself a signal of optimism and confidence in the U.S. and its long-term growth.

Q: Is this a good time or a bad time for someone to start a company?

A: My own personal view is that it's never a bad time to start a company. There are good cases to be made that starting in an economic expansion is great because consumer demand is high and people will spend money. There's arguments to be made that starting in a downturn, whether it's a recession or a bear market or a sluggish recovery is also a good time. If you're a tech startup for example, the demand for technology has been pretty constant the past few years. IPad sales went through roof at a time when the economy was deep in a recession. That's obviously a big company, but lots of other companies have glommed on to that heavy tech spending. There's also schools of thought that say if you start up in a recession, it's sort of a trial by fire. If you start up in hard times, and you survive, there's less competition and you come out of it stronger.

A few years ago, we did a count of Fortune 500 companies, and over half of them were founded either in recessions or bear markets. That's not simply a reflection of, well, they started in a recession, therefore they're better. I think it's a reflection of, if you have an idea or if you create an opportunity or if you're in a university and you've stumbled across some discovery, there is that entrepreneurial drive … and the macroeconomic environment doesn't matter if you come up with that idea.

There's not necessarily a one-to-one corresponding relation between the macroeconomic environment and the demand for and supply of new ideas and innovation.


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