The poet Matthew Arnold got it right when he wrote in his poem, “Dover Beach,” that the world had neither “certitude, nor peace….”
Over the years, there have been all kinds of efforts and demonstrations on behalf of peace, but it is rare to have people trekking all the way to Washington, D.C. to petition Congress for certitude.
That is exactly what happened last week, though, when small business owners and managers testified at hearings held by the House Subcommittee on Economic Growth, Tax and Capital Access. They were explaining to Congress what happens in the real world of business when the government can’t make up its mind about what it is going to do — about taxes, especially, but about regulations, too.
The business people who testified talked about investments not made and people not hired because the tax situation is so uncertain — and the cost of guessing wrong about government action is so high that most investments simply aren’t worth it. They don’t pay enough to offset what the additional tax bill would cost.
Economists at the Federal Reserve Bank of San Francisco have estimated that in our current economy uncertainty is responsible for raising our unemployment rate by 1 percent. That is over 1½ million Americans who are out of work and about $40 billion in lost wages subtracted from the economy due to uncertainty.
The federal government’s inaction on fiscal policy is not responsible for all of that uncertainty, of course, just most of it. And those are real people, real wages, and real economic loss. Dithering is expensive.
American business is remarkably resourceful and can adapt to almost anything. When the Federal Reserve describes the U.S. economy as “resilient” and able to absorb shocks, American businesses are leading the process.
Businesses are used to dealing with uncertainty. There are riskier things to do in life, of course, and poring over a budget spreadsheet doesn’t usually provide the adrenaline rush of jumping out of an airplane or driving a high performance automobile flat out on a race course. But there are few things more chancy than starting a business and few things in life provide the day to day awareness of risk that running a business brings.
Uncertainty and risk in business is built into every business plan, every sales forecast, and every estimate of product development costs. That kind of uncertainty, though, is accepted as a natural part of life and of the business environment.
What is tougher to accept is the kind of risk that is artificially created. That resembles natural risk only in the same way that the lunacy of Russian roulette resembles casino gambling.
Business cannot adapt very well to the kind of artificial uncertainty that Congress creates. From the perspective of a smaller business right now, for example, payroll taxes will go up in January … or they might not. The 2001 tax reforms will expire on Dec. 31 … or they might not. The Dodd-Frank financial regulations might finally be ready … or not.
The administration’s plan to raise personal income tax rates also would have a direct impact on smaller businesses. Most of these businesses today are organized as “pass-through” organizations, where the business itself does not pay income tax at all. For tax calculation purposes, the net income is passed through to the owners as personal income and they pay the tax on it.
This change in business structure treated businesses more like partnerships, and was approved by Congress, as well as state legislatures, so that smaller businesses could avoid the double taxation that occurs when a corporation pays dividends.
The owners of smaller businesses, then, pay income taxes just like everybody else. The only difference is risk. In most cases, everything that the entrepreneur owns is on the line, at risk, in his or her business. That risk is very real. More than a few entrepreneurs have told me that some days you can taste it.
They are not complaining about that risk. They took it on willingly. What they are complaining to Congress about are the unnecessary risk and uncertainty that the federal government has created by its dithering.
It would be unrealistic to expect that anything will be done about fiscal policy until after the election on Nov. 6. Until then, we will have to be satisfied with traffic-stopping high-roller fund-raisers and campaign news coverage often in headlong pursuit of minutiae. Watching it all must bring a special joy to those million and a half Americans who have been pushed aside in Washington’s rush to inaction.
In risk situations, from business to flying planes to life itself, a bad decision’s cost is usually small compared with the cost of no decision at all.