More small firms closing than opening

  • The Washington Post
  • Wednesday, September 17, 2014 2:58pm
  • Business

Americans are starting fewer businesses, new companies are going out of business more quickly, and the new firms that do get off the ground are creating fewer jobs.

None of that bodes very well for an economy still trying to find its footing.

“America’s entrepreneurs need help,” John Dearie, executive vice president of the Financial Services Forum, a trade organization in Washington, said during a recent hearing before members of the House Small Business Committee. In terms of the start-up economy, he said, all vital signs “are flashing red alert.”

Dearie cited research in his testimony showing that new firms — rather than, as is so often argued, small businesses in general — historically generate virtually all net new jobs generated each year in the United States. However, their annual hiring contributions have dropped about 40 percent since 2000, accelerating a downward trend that has been going on for the past three decades.

In part, that’s because the number of new businesses has steadily declined. Data from 2011 showed that only 8 percent of companies are less than one year old, down from 15 percent of all firms back in the late 1970s, with a particularly sharp decline taking place during and in the years immediately following the Great Recession.

Meanwhile, the number of young firms going under within the first few years has increased. Consequently, for the first time in 30 years, business deaths now outnumber business births, according to the U.S. Census Bureau.

In order to reverse the trends, experts said, entrepreneurs are going to need some additional support from Washington. During the forum on the Hill, they outlined several immediate actions they believe federal lawmakers could take to revive the ailing entrepreneurship economy.

Overhaul the immigration system

Dearie and Jonathan Ortmans, senior fellow at the Kauffman Foundation, an entrepreneurship research organization, agreed that immigration reforms represent one of the most powerful possible moves lawmakers could take to spur new business formation and help existing start-ups grow their enterprises more quickly.

“It is not an exaggeration to report that our nation’s immigration policies enrage” entrepreneurs, Dearie said. Citing conversations with start-up founders in a dozen cities during a recent roundtable tour across the country, he added that the “most serious obstacle to additional hiring by new businesses is a pronounced shortage of qualified talent.”

Improving the educational system in the United States would help, he said, but the effects would not likely be felt quickly enough. Plus, half of U.S. graduate students in science and math fields — an area in which the skills gap has been shown to be widest between what employers need and what job candidates possess — now come from other countries, so many who may want to stay and work here would still be forced to return home after graduation.

Dearie advised policymakers to eliminate an annual limit on the number of H1-B visas — the type generally awarded to highly skilled immigrant workers, particularly in technology positions—and award a permanent residency card to every foreign-born student who graduates from a U.S. university with a degree in science, technology, engineering or math fields.

Ortmans focused his attention on another immigration reform proposal, known as the start-up visa, which targets foreign-born individuals who demonstrate that they can start and grow their own firms in the United States. He pointed to research showing that immigrants historically start more companies than native-born citizens and are generally more innovative. In the high-tech sector, for example, nearly one in four new firms are now started by immigrants.

Giving more of them a pathway to enter the United States and create new jobs for Americans, Ortmans argued, “would have an immediate impact on business creation and growth.”

Help rein in student debt

Ortmans noted there are reasons to believe that new business formation rates could soon bounce back, including that fact that in the coming decades more Americans than ever will be between the age of 30 and 50—historically, the prime ages to launch a company.

However, many of them are entering their peak entrepreneurship age with a mountain of student debt. A number of proposals to ease that burden on college graduates have made their way into — but not yet through — Congress. If lawmakers eventually take steps to tackle or at least reduce the nation’s cumulative student debt, Ortmans said “it would boost entrepreneurship by reducing the financial constraints on younger entrepreneurs.”

Moreover, he added, because “young firms disproportionately employ young workers, and also pay a premium to young employees relative to older firms, the additional new and young businesses would also provide more plentiful and more lucrative job opportunities for younger workers.”

Reduce regulatory burdens

Several speakers argued that regulations can provide a useful framework to promote business and commerce. But many said the federal government’s maze of outdated and often contradictory regulations has instead become enormously detrimental to many entrepreneurs.

“The stifling effect of regulatory burden, complexity, and uncertainty is particularly acute for new businesses,” Dearie said, adding that they “lack the resources and scale of larger firms over which to absorb and amortize the costs of compliance.”

Ortmans noted that “as new regulations are enacted on top of existing rules, businesses are faced with the challenge of navigating an increasingly complex regulatory regime.” More specifically, he urged Congress to take a look at what he described as superfluous and often expensive licensing requirements that deter some would-be entrepreneurs from starting businesses.

Dearie took his prescription a step further, asking lawmakers to work with the Congressional Budget Office and the Office of Management and Budget to develop a special regulatory framework that firms would be subjected to for their first five years in business. It should be comprised, he said, “of only the most essential product safety, environmental, and worker protection regulations.”

Increase access to capital

“While securing financing has always been a major challenge for entrepreneurs, our roundtables made clear that circumstances have become significantly more difficult in the wake of the 2008 financial crisis,” Dearie told lawmakers. He explained that the personal savings of many prospective entrepreneurs were diminished during the financial crisis — and the same likely goes for friends and family they may have turned to for early-stage investments.

Meanwhile, and in large part because of the same reasons, investments by individual angel investors suffered and has yet to fully recover in the wake of the recession.

Dearie advised lawmakers to consider authorizing changes to the Small Business Administration’s lending programs and investment funds. In addition, he voiced support for a tax credit for those who invest in new firms equaling 25 percent of the investment and relieving from federal income tax any gains on stakes in start-ups that were held for at least three years.

Create a start-up tax status

John Deskins, an economics professor and director of the Bureau of Business &Economic Research at West Virginia University, pushed back against a commonly held noting that tax rates are a relatively harmless policy issue for start-up founders.

“A lower average tax rate for self-employment income relative to that of wage and salary income has been shown to encourage transitions to self-employment,” Deskins said. He added that tax credits for research and development — the sort that have come and gone from the federal tax code over the years — have also been shown to encourage more early-stage investments by start-ups.

However, it’s not merely lower taxes, but also simpler taxes, that would help spur entrepreneurship, Dearie said.

“Tax complexity and uncertainty, like regulatory complexity and uncertainty, divert the time, attention, and energy of entrepreneurs away from the essential tasks required to successfully launch and grow their businesses amount to mortal threats to new businesses, particularly in the critical early years,” he said. During his discussions with new business founders around the country, he said many told him they would exchange higher tax rates for a simpler system.

Congress, Dearie said, should thus consider a new tax status for entrepreneurs — what he called an “e-corp” — which would subject new firms to a low, flat income tax for their first five years. Such a system, he argued, “will help cultivate new business formation, survival, and growth by allowing new businesses to retain and reinvest most of what they earn, preserving critical cash flow, and eliminating the distraction and burden of tax complexity and uncertainty.”

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