President Obama's jobs council is set to propose help for new start-up companies as a key component of its recommendations for encouraging hiring. But one expert on entrepreneurship says that's the wrong approach to the present jobs crisis.
The panel, which will hold its third meeting Tuesday, will propose that Congress eliminate taxes on income from investments of $25 million or less in a privately held firm, so long as the investment is held for at least five years, according to a report in the Wall Street Journal. And the panel will also reportedly urge cuts to corporate income taxes for the first three years of a new company's existence.
But Scott Shane, an economics professor at Case Western Reserve University, thinks the focus on startups is off base. "Most of the businesses that create jobs are not new--they're more established businesses," Shane, the author of the 2008 book, "The Illusions of Entrepreneurship: The Costly Myths that Entrepreneurs, Investors, and Policymakers Live By," told The Lookout. "The businesses that are brand new in a given year are only accounting for a couple percentage points of total employment."
"A tax cut for new businesses doesn't do a lot for existing businesses," he said.
Nor, despite the hype, are the major job creators likely to be dynamic, new-economy companies, he said. "These policies assume a small number of super high-growth businesses are where jobs are created," Shane continued. "Like you're going to get the next Apple or Google." In fact, he said, the bulk of actual job creation is more mundane. "It's getting another barber in the barber shop, another person working at the dry cleaner."
Even for existing businesses, a corporate tax cut doesn't help most of the real job creators, Shane said. "Most small businesses are not corporations, they're sole proprietorships," he said. "Corporate taxes are irrelevant to them."
Part of the problem, Shane argued, is the composition of the president's jobs council, which is chaired by G.E. chair Jeff Immelt, and made up mostly of other big business executives, including several from the tech sector.
"These are people who are part of the system of creating high-potential, high-tech companies," Shane said. "They're not people who have a tremendous amount of expertise on small businesses."
That's a problem, he added, because "the issues that a venture-capital-backed startup is facing today are just not the same issues that a typical small business is facing."
What would be a better approach? Existing firms aren't hiring because of a lack of demand for their products and services, Shane said, so any effort to encourage them to hire needs to address that lack of demand. In addition, many small businesses are dependent on small-scale investments made by their owners, who for a while tended to borrow against the value of their homes. That meant the housing bust took a big toll on financing for small businesses.
"So if you want to get small businesses expanding, you need a way to replace the credit they had got by using their homes," Shane said.
In addition to the recommendations on startups, the jobs council also will propose efforts to streamline regulations, in order to ensure new construction projects are green-lighted more quickly, and to encourage foreign investments. Both are ideas that the administration has touted several times before.
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