The Small Business Sleight of Hand

My youngest son, "10", skips into the house after-school one day waving a field trip permission slip- *the* field trip of all field trips. I read the form and notice that the money is due tomorrow (GASP!) and only exact change can be sent. We’ll overlook the fact that said form has been hiding in his desk at school until this day, and jump straight to the fact that I only have a $20 bill in my wallet, and exact change would be $10.00. I’m not willing to gamble the loss of $10.00 (that will supply me with 2 containers of drug store lipstick!), so I’m forced to bow my head and go Mr. Moneybags, my oldest son, "17", to see if he has change for his mother.

"17" checks his wallet and reports, with an approving, confident grin on his face, “Well, I have a $10 bill and a $5 bill. Tell you what, you give me your $20, I’ll give you my $15, and then you can give me the remaining $5 the next time you go to the bank.”

Did you catch that little sleight of hand? I’ve told this story to relatives, who actually care about my daily conversations with my children, and it went right over their heads. They saw it immediately as Problem Solved, 10 gets to go on his field trip, and all is right in the world!

What’s the point to this story, you ask? As is happening across the country, the business climate in our town is suffering. Our little suburbia thrives on mom-and-pops, small business franchises, and the service industry. My salon, for example, has more empty chairs than full now, a complete reversal from just a year ago. While we won’t discuss the level of sheer panic I went through after learning my stylist was let go, the stylist it took me 30+ years to find, businesses are hurting with fewer customers, and /or existing customers with smaller discretionary spending budgets.

As a small business owner myself, I listened with intent to President Obama announcing at a town-hall style event in New Hampshire last week that he will be introducing job-creation measurements for small businesses, the engines of America, in a few different ways.  (Don't lose me here, I swear you'll be able to follow, even if you hate the idea of taxes, the government, and politics!):

1. Channel funding through banks or the SBA to make loans more available to SB owners

2. Issuing a $5,000 tax credit for every “net” new worker hired in 2010

3. Reimbursement for Social Security taxes paid when existing wages are increased

4. Cutting capital gains taxes on investments

5. Write-off instead of depreciate “newly” purchased assets, another tax cut measure.

Sounds FANTASTIC right? Problem solved, employers will be hiring, people will have jobs and income, (which also means their discretionary spending budgets will increase), and all is right in the world. Wait for it; wait for it…see that sleight of hand? Sounds good, until you reeeaallllly think about what’s being proposed.

Let’s back up just a moment and look at this in the eyes of, say, the owner of my salon; a mom like me, a pro like me, and a taxpayer like me. Breaking it down looks a little like this:

1. A small business loan will be TERRIFIC for my salon owner if she is adding chairs, dryers, or moving to a larger facility. But with fewer customers, she can’t fill the space she already owns. When funds to meet her payroll begin depleting, she’s not going to take a loan out to cover the expense. She’s going to lay stylists off until business picks back up, or, she will take a cut in her own income to get over the hump. This incentive simply isn’t going to do anything for her.

2. A $5,000 tax credit per “net” new employee will be TERRIFIC if salon owner had the aforementioned customer spending to justify hiring a new employee. But she doesn’t. She has empty chairs, meaning fewer customers, as it is. This incentive simply isn’t going to do anything for her.

3. For the stylists that are still there and deserving of a pay raise, a social security tax “reimbursement” would be TERRIFIC, if the aforementioned customer spending picked up and the books allowed expansion of payroll to existing employees. Additionally, #2 and #3 would only be for 2010, what about the next 10-20 years of payroll expenses outside of salary, you know, like, matching Social Security "contributions", unemployment insurance, workers comp, health benefits, and other expenses. This incentive simply isn’t going to do anything for her.

4. Capital gains taxes will not apply to her whatsoever unless she sells her business, or purchases equipment that doesn’t depreciate. Chairs depreciate. So do dryers. So does any other equipment that she might purchase that enables her business to operate. This incentive simply isn’t going to do anything for her.

5. Again, unless the aforementioned customer spending picks up justifying the addition of newly purchased assets, the tax incentive to write-off those newly purchased assets simply isn’t going to do anything for her.

People in business, that plan to STAY in business, have enough sense not to spend beyond their means just for the sake of a tax credit, especially when they are having to lay off their personnel just to make ends meet. As my little handy dandy financial graph has shown me in my own business (in foresight and in hindsight), we saw our revenue take a swan-dive back in 2002, suffering from the same repercussions from 9/11 as everyone else. Nothing was done to encourage us to hire or retain staff, except those infamous, ever-hated tax cuts. Our business recovered, we have been thriving ever since, until about 6 months ago when TARP spending came into play. Now we’re scared to death to do anything with our business except maintain the status quo. At any rate, those, infamous, ever-hated tax cuts will expire at the end of this year with no plan for extension, much less a permanent extension.

For my salon owner, what this means is that not only can she barely afford to keep what little staff she has left, nor will she benefit from any of the “incentives” being offered by the federal government, but now she will also take a 5% penalty on her personal income taxes once the infamous, ever-hated tax cuts expire. 5% on $100 isn’t a lot of money; no big deal. But because she is a small business owner, she will claim her “business” income on her personal income taxes. Now think about that. 5% on her business income is enough to pay an employee for a year, and does! If she keeps that money, her employee keeps her job.  If she pays that money in increased taxes, you can bet your 'tax cuts' that the employee will lose her job.  Again, that bait-and-switch technique rears its ugly face.

The President is doing his best to promote entrepreneurial confidence by outlaying his hiring/spending incentive plans, yet on the other hand, he will stifle any confidence in hiring/spending once he allows the tax cuts to expire- the one and only thing that business owners are directly benefitting from when consumer spending is at an all time low. Sure, those infamous, ever-hated tax cuts won’t do anything to promote job growth in my salon owner’s world, but it will allow her to keep just one more person off the unemployment line.

Until the economy picks back up and consumers are freely spending their discretionary income, those infamous, ever-hated tax cuts are about the only thing that will make all right in her world, and millions of others just like her.

For the record, because of "17"’s little bait-and-switch technique (and evidently a well-developed one), poor "15" and "10" were forced to endure a 3-hour tutorial on basic economics, lest "17" comes after them next.