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Small and Medium-Sized Businesses Must Grow
Business Journal

Small and Medium-Sized Businesses Must Grow

Cutting taxes and reducing deficits just aren't sufficient to save the American economy

Excerpted from The Coming Jobs War

In our hot election season, you're not likely to hear this: America's small and medium-sized businesses must miraculously start up and grow like never before. If they don't, your local, county, state, and federal government tax bases will tank. And all the entitlements and government programs -- thousands and thousands of them all across the country and states and cities -- will be drastically cut if they continue at all. Very soon, Social Security payments will need to be cut by a third; Medicare and Medicaid will need to be cut by a third; city, county, state, and federal jobs will need to be cut by a third; and the defense budget will need to be cut by a third.

Of course, there's a temporary way out of this mess -- raise taxes way up.

This is where America is now. The pile of cash from taxes sent to Washington is about $2.6 trillion, and the amount Washington is spending is about $3.7 trillion.

Of course, there's a temporary way out of that mess -- raise taxes way up. Americans are even willing to do it. Gallup finds that Americans would rather pay more in taxes than see their entitlements cut. But that solution has a flaw: If people and small businesses are paying higher taxes, although the government has more to spend, people and businesses have less to spend. When consumer spending drops, businesses have less to spend on expansion and hiring.

Gallup also finds that 47% of Americans endorse the idea of taxing the rich. This is not a long-term solution either. "Rich" is typically defined as having an annual household income of $250,000 and higher, depending on whom you ask. By and large, many of these "rich" people own or work in small to medium-sized businesses, not big business, and they reinvest their assets into their companies when their confidence is high.

They're using their money to keep their organizations running, which keeps their employees working, which keeps them spending, which keeps businesses functioning, which keeps the GDP growing. Raising business taxes drains the financial pool that should be used for creating jobs and for the R&D and investments that invent the stuff people want to buy.

And then there's this fact, which few people seem to recognize: All money is going to get spent anyway. You'll spend it, your business will spend it, or your government will spend it.


But be aware, any solution to job creation requires a lot of consumer spending or the GDP fails. America needs to simultaneously cut taxes and raise business output so there are a lot of jobs and everyone has money to spend at the mall, to fix up their home, to buy fishing equipment, and so on. A massive 70% of U.S. GDP is based on that consumer spending. So when consumers' take-home pay is reduced, by default, they lower their spending and subsequently lower the GDP.

And don't forget, small and medium-sized businesses are consumers, just as much as the guy buying a fishing pole. These organizations buy all kinds of things for their own businesses. So they are keeping 70% of the GDP energized as well.

Staying afloat by creating debt

This is the seminal point about job growth: Changing how the pie is cut doesn't significantly change anything. Governments can take more money from here and less from there, but in the end, there's not enough money. In any case, raising taxes too high doesn't create jobs.

Nor is it enough to reduce the government's super-bloated deficits and to halt runaway spending. Those things must be done before America drowns in costs and debt, but that won't create job growth. What deficit spending does do is add fuel to a speeding train that ensures a more spectacular crash. This is exactly the track the country is on now as a result of huge entitlement costs and miniscule GDP growth to support them. America is currently staying afloat by creating more debt.

So if you receive a paycheck from the local, city, state, or federal government, you run a high risk of not only losing that paycheck, but also the promise that you will receive a pension plus benefits for life. A wide variety of government jobs and teaching positions in public schools are being cut as I write this. This is because tax revenues from businesses are shrinking as those businesses shrink.

With fewer jobs, there are fewer workers to fund Social Security. So payments get cut.

Because most Americans don't understand this, you'll soon hear remarks like the following:

"My hard-earned government pension has been slashed." You'll start hearing this slowly at first, and then all the time. That's because when the GDP has no growth, there is no job growth, which depletes the once huge tax base that pays for everything. And so the government has to cut services by a third, including government pensions.

The more profit any company earns, the more investors make, and a lot of investors aren't people, they're retirement programs. When any company's value goes up, everybody gets a little safer and richer because everyone has a little money invested in everyone else. All money and jobs are closely connected. It's like oxygen -- everyone breathes the same air. That's why the recession wiped out so many investment plans and shrunk U.S. GDP. GDP is like your sales or your checkbook. It has to outrun expenses or you go broke.

"No one is paying my parents' hospital bill." When GDP growth is stalled, the tax base that comes from small and medium-sized businesses shrinks. As a result, your parents can't have full, taxpayer-funded health services anymore. The government will have to cut these entitlements by a third. Medicare and Medicaid will cover much less, and the rest your parents will have to cover themselves. Things will only get worse when you are elderly.

"Who stole my Social Security savings?" If America no longer has the big tax base created by small and medium-sized businesses or the required ratio of workers to retirees to be solvent, it will have to cut Social Security by one-third. Of course, there has never been a Social Security "savings account," and Americans have never paid in anywhere close to the amount they collect. Many Americans believe that they have paid in an amount equal to or greater than what they receive in Social Security payments. But Americans pay in far less than they receive over a typical working career, and the remainder is funded by other workers. It is a transfer-of-income system, not a savings account. Currently, it takes about three workers paying Federal Insurance Contributions Act (FICA) taxes to support one retiree, and the system works as long as there is a ratio of three workers to one retiree. But it crumbles as the ratio of workers to retirees becomes, say, two to one.

With fewer jobs, there are fewer workers to fund Social Security. So payments get cut. And it's a significant problem for a democratic system that has elected officials who don't want to address it, because explaining that this program simply cannot continue making the payments the way it does now will cause them to lose elections. America's democratic system is easily the best in the world, but it is failing here.

The country really needs small and medium-sized business to grow and thrive -- and it needs this to happen now.

Jim Clifton is Chairman and CEO of Gallup. He is the author of The Coming Jobs War.

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