The most misunderstood and misused phrase in economics and politics is that “small businesses are responsible for 2/3 of all new jobs”. This sentiment, uttered by President Obama last August, was gleaned from data produced by the SBA, which reported that small businesses “generated 65 percent of net new jobs over the past 17 years”. Since then scores of pundits, analysts, economists, and politicians have regurgitated the sound bite to meet their own specific agenda.
The problem, however, is that the definition of small business is misunderstood – and has different definitions – to different people. Obama maintains that “small businesses with fewer than 50 employees…are the businesses that usually create most of the jobs in this country”. Unfortunately, he uses this line to justify credits for small business (health care, etc). That makes for good political speech, but those businesses doesn’t make jobs. His assertion is patently untrue.
The SBA is the group who sets the legal definition of a “small business” which is one with fewer than 500 employees . Going back and using the data from them – and cited by Obama – it is clear that his threshold about small businesses – under 50 employees – is incorrect. SBA data shows that “much of the job growth (of the 65% net new jobs) is from fast-growing high-impact firms, which represents about 5-6 percent of all firms and are on average 25 years old”. Clearly then, the majority of these are not businesses with fewer than 50 employees.
Small businesses under Obama’s definition tend to share similar characteristics: they typically have a more localized market, lack of abundant and available credit and capital, and lower volume of sales than their larger small business counterparts. As such, these businesses lack the necessary qualities to create the type of job growth that Obama references.
Even more frustrating is the fact that Obama wants to raise taxes on those earning 250K or more. To the average household, 250K sounds like a high-income threshold. What he doesn’t tell you is that this effectively also raises taxes on small businesses, the very group he purports to want to help. Most small businesses file as sole proprietorships, LLCs, and Scorps, and by doing so, pay taxes at individual rates. In the realm of business, 250K is not a lot. Raising the margin for those earning over that amount will raise tax rates on small business owners, thereby reducing their profit margin to reinvest in their company or create new jobs.
Either Obama is clueless about small businesses and job creation, or he is lying. Either way, one thing that is not misunderstood is his incompetence.