Tax Credits Are Good, But More Is Needed To Help Small Business

Democratic presidential nominee Kamala Harris proposed policies aimed at helping to spur small business creation across the U.S. at a campaign stop at in New Hampshire on Wednesday while also calling for a smaller increase on capital gains taxes that President Biden has proposed.

Vice President Harris’s big announcement was that she would expand the small business tax credit tenfold from $5,000 to $50,000 to help offset the average $40,000 she said it costs to launch an enterprise. Under this new proposal, startup businesses could spread the deduction out over several years, or delay taking the $50,000 deduction until the company becomes profitable. This would help ease the tax burden for entrepreneurs in the early stages of building their companies.

“As President, one of my highest priorities will be to strengthen America’s small businesses,” Harris said. “So, first we’re gonna help more small businesses and innovators get off the ground.”

In addition to growing the number of startup businesses, Harris said she want to make it easier for existing firms to expand by cutting the “red tape that can make starting and growing a small business more difficult than it needs to be.”

Regarding lowering the capital gains tax, Harris said “when the government encourages investment, it leads to broad-based economic growth and it creates jobs which make our economy stronger.”

The proposals that the vice president outlined in New Hampshire were the most specific that she has presented regarding small business growth. She said during the speech that she has set a goal of collecting 25 million new small business applications in her first term, (if she is elected president). This would be six million more than the 19 million recorded under the Biden administration thus far.

While these proposals might be beneficial for entrepreneurs, there are other policies that would be more the potential for small business owners.

Lowering inflation. Cost structures are making it very challenging for small businesses to turn a profit. Rents are high, the cost of raw materials and inventory has gone up dramatically over the past two years, and states keep raising the minimum wage, which hits smaller companies much harder than big corporations.

For instance, the minimum wage in California will increase from $16.00 per hour to $16.50 per hour on January 1, 2025. This increase applies to all employers, regardless of size. Restaurants, for instance, are already struggling to pay ever increasing ages, and the reality is that there is only so much that someone is willing to pay for a cup of coffee. Because of inflation, restaurateurs are seeing their average bill size go down, as people refrain from ordering cocktails for $15 or $16 each. The problem for restaurant owners is that many of them rely on the markups on alcohol to generate their profits. People still like to dine out, so if they don’t want to cut back on how often they do it, they will look to lower their costs when they order their meals.

Creating a tiered-tax policy that benefits small businesses. Progressives often point at corporate profits and say they want large firms to “pay their fair share.” But not every business is reaping huge profits. In August, Vice President Harris proposed raising the corporate tax rate to 28% from 21%. That’s a big jump, and while many corporations might be able to handle it, small businesses will get hit badly without a tiered approach or exemptions toward this tax increase.

Growing the economy in right way, not just spending more government money. When the government borrows money to finance spending (through bonds or printing money) on defense, creating government positions or funding social policies, it works it increases the money supply. Having more money in the economy enables consumers and businesses to spend more, but it also reduces the value of money and ultimately leads to inflation. For the past two years, the Fed has tightened monetary policy by raising interest rates, in part to counteract increased government spending. With the central bank looking to lower interest rates soon, but that could be counterbalanced if the government continues spending.

Further digitizing SBA lending. The increased digitization of small business lending has streamlined the process and mitigated lender risk while also expanding access to capital for women-owned, minority-owned, and immigrant owned businesses. Since the vice president says she wants to dramatically expand entrepreneurship, making funding available quickly and efficiently will help accomplish that goal.

Easing regulations on the banking industry. Banking regulations like Basel III impose higher capital requirements on banks, meaning banks must hold a certain percentage of their assets in safer, liquid forms like cash or government bonds. Since loans to small businesses are often considered riskier, banks must hold more capital reserves. This hurts lending to small businesses. Additionally, regulations often require banks to implement stricter reporting, risk management, and compliance processes. These requirements raise banks’ operational costs. This is why reducing regulatory burdens can lead to increased lending.

We can expect Kamala Harris to continue to refine her economic plans as we approach Election Day. Because of her late start as the Democratic nominee, her platform has been fluid, but in the coming weeks, we should expect her to refine and solidify her positions – especially after her first head-to-head debate with former President Trump next week on September 10.