Small Business Job Creation?

In the political debates we continue to hear small business praised as the real job creator—as shown in last night’s encounter. The problem here is how to define “small business.” I will propose a three-fold division—which can then be further collapsed. Small business then means those employing 1 to 99 people, mid-size business as those employing 100 to 999, and big business as employing 1,000 people or more. If we then say that “mid-sized isn’t small, and neither is big business,” then we can derive small and big, big being a combination of mid-sized and the bigger.

I will show here a variant of a graphic I published on LaMarotte back in September of 2010. It shows job creation data for the period 1992 through 2005 from the Bureau of Labor Statistics (link). The series I used has not been updated in the same way since. The graphic here shows net quarterly gains for the period 3Q 1992 through 1Q 2005:

Note here that these are net gains, thus gains when job losses have been reflected. Note also that the two lightly colored bars, for the mid-sized and the big business category, together form the second bar.

In this expansionary period, bigger businesses created more jobs than small business. The following tabulation brings the relevant details:

Average Quarterly Change in Jobs, 3Q 1992 to 1Q 2005
	Firms by Employment Size
	1 to 99	100 or more	100 to 999	1,000 plus
Percent of Total Firms	97.6	2.4	2.2	0.2
Gains (in 000)	4,067	2,599	1,374	1,225
Percent of gains	61.0	39.0	20.6	18.4
Losses (in 000)	3,879	2,381	1,273	1,108
Percent of losses	62.0	38.0	20.3	17.7
Net gains (in 000)	188	218	101	117
Percent of net	46.3	53.7	24.9	28.8

Worth noting here is that small business did create more jobs than the larger categories—but the category also lost more jobs than the others. The large losses wiped out 95 percent of the small business gains—and this was a period of growth. The vast majority of firms is small, to be sure, not quite 99 percent, but close; 2.4 percent of firms produced more jobs than the 97.6 percent. But when it comes to trying to influence the masses, the politicians know whom to praise. 

Taxes in Some Perspective

With the payroll tax cut shenanigans now provided to give us holiday entertainment, I thought I would add some perspective on taxes over a 50-year period. We’ll start with total revenues collected by the Internal Revenue Service in graphic form, showing various tax categories as percent of total IRS revenues in 1970, 1980, 1990, 2000, and 2010:

What I’m showing here is business and individual income taxes, the employment tax deducted from wages, estate taxes, and excise taxes. Excise taxes are levied on alcohol, tobacco, telephone services, and transportation fuels. Not shown are gift taxes; they’ve amounted to maximally 0.2 percent of total in each of these years, most recently, in 2010, 0.1 percent of total IRS revenues. These data are from Table 6 of the 2010 IRS Data Book.

Note here the importance of individual income taxes. They amount to more than half of all revenues right up to 2010, and in that year they represented 49.6 percent of total. Note that all categories show a drop in share of total except employment or payroll taxes. These have been climbing. The interesting aspect of that is that employment taxes are categorical. They constitute Social Security and Medicare Contributions.

Income tax totals, while they are interesting in showing their importance, do not show changes in tax rate. Therefore I next show the top marginal tax rate next, going back to 1960:

What this graphic shows is that the top tax rate has dropped from a 1960 peak of 91 percent to 35 percent. That last rate, in 2011, was levied on all income exceeding $379,150 for a married couple filing jointly. You might say that that number is where wealth really begins. Now some will say that a rate of 35 percent on income above $379,150 is not comparable to a rate of 91 percent in 1960—because of inflation. Indeed, that is true. That sum, in 1960, would have been $52,095. And the 1960 tax rate on that amount was 62 percent. I obtained the data shown from the Tax Foundation (link).

I am providing, below, a tabulation of the data used in this last graphic. Years not shown had the same rate as the last year actually shown. Thus in the period 1961-1963, the rate was also 91 percent on all income exceeding $400,000.

Year	%	On income of more than ($):	Year	%	On income of more than ($):
1960	91	400,000	1995	39.6	256,500
1964	77	400,000	1996	39.6	263,750
1965	70	200,000	1997	39.6	271,050
1970	70	200,000	1998	39.6	278,450
1977	70	203,200	1999	39.6	283,150
1979	70	215,400	2000	39.6	288,350
1980	70	215,400	2001	39.1	297,350
1982	50	85,600	2002	38.6	307,050
1983	50	109,400	2003	35	311,950
1984	50	162,400	2004	35	319,100
1985	50	169,020	2005	35	326,450
1986	50	175,250	2006	35	336,550
1987	38.5	90,000	2007	35	349,700
1988	28	29,750	2008	35	357,700
1990	28	32,450	2009	35	372,950
1991	31	82,150	2010	35	373,650
1992	31	86,500	2011	35	379,150
1993	39.6	250,000

My purpose in showing such data? I’m interested in looking at the proposition that cutting taxes on the wealthy increases jobs—because it is the rich who create jobs. Well, here are some early indicators. The following table shows increase in employment, December to December in four decades:

Decade	Tax rate change in %	Employment change %
1960-1970	-23.1	31.7
1970-1980	0.0	28.5
1980-1990	-60.0	20.0
1990-2000	41.4	21.4
2000-2010	-11.6	-1.7

Here the tax rate change is from the first to the last year. The employment change is from  December to December, thus in the first line, 12/1960 to 12/1970. What this tabulation tells me is that top tax rates may have nothing whatsoever to do with employment increase or decline. We’ve had the largest increase in employment in a period where the marginal rate went from 91 to 70 percent. In the 1970-1980 decade, when the top rate was at 70 percent, we still had high growth in jobs. When rates dropped from 70 to 28 percent, the biggest drop ever, we added the fewest jobs—but did much better in the next decade when taxes increased from 28 to 39.6 percent. And in the last decade, when our taxes dropped again, from 39.6 to 35 percent, we actually lost job in absolute count.

It feels better to know something than not to. In any case, the notion that giving the wealthy more dollars to spend will result in job creation is certainly a big canard.

Causing Giraffes to Dance

On the eve of President Obama’s much touted Jobs Speech, a few basic observations.

Not that an ant addressing a thunderstorm is likely to be heard—or that any kind of observations, sage or not, will influence anyone in Congress or the White House. Those people need help, not advice. The Madness has them in its thrall. Rather, I say these obvious things just to remind myself that sanity still rules. And others, reading this, might feel mildly better, thinking: Well, at least I’m not alone.

U.S. Presidents are elected to “take Care that the Laws be faithfully executed.” The Constitution does not make the President responsible for the economy. It is minimally a sign of growing collective irrationality to assume that rulers are divine and therefore responsible for the weather, be that physical or economic.

The only way to create a job is by hiring somebody. The President can only do so by persuading Congress to vote him the money to hire federal workers. He hasn’t got the votes. He knows that. We know that. So what is this gesturing all about? Another way he could make jobs is by persuading Congress to vote money for the States specifically earmarked to hire state workers. He hasn’t got the votes. Etc.

Giving people money (about $75 per month if they are working and if they are earning at least $45,000 a year)—hoping they will spend it and that that spending will cause others to hire—that’s not “job creation.” And if that money is taken from Social Security, won’t that just increase the deficit? Nor is easing air pollution rules—hoping that companies will have more profits and will spend that profit on new jobs—that’s not “job creation.” Nor is giving businesses further tax cuts—if they hire workers. If they’re not hiring workers now, why would they do so for a tax cut? And wouldn’t yet more tax cuts cause more government layoffs?

Please!

If you want to teach giraffes to dance, deploy a lot of people with electrical cattle prods into the zoos of America. Let them teach those giraffes to jump around funny. You won’t succeed by planting low trees next to high trees with foliage giraffes happen to like—hoping that in reaching high and reaching low, the giraffes, as they feed, will perform the kind of squat-jumps you happen to have in mind.

Our policies are like that.

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Pic credit is Wikipedia (link).