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Economic Signs Paint Bleak Picture for the Future


Written by Gene Quinn
President & Founder of IPWatchdog, Inc.
Patent Attorney, Reg. No. 44,294
Zies, Widerman & Malek
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Posted: July 11, 2011 @ 4:26 pm
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The U.S. Chamber of Commerce conducted two small business focus groups on April 1, 2011, in Philadelphia, as well as a national survey of small business owners through interviews with 900 businesses April 8 – 12, 2011. The findings from this study make up the inaugural quarterly “Small Business Outlook Survey,” and paint an unfortunately bleak picture of the collective outlook of small businesses moving forward.

Small businesses are the backbone of the nation’s economy and those that are most likely to engage in job creation.  Unfortunately, the small businesses surveyed tell a tale of little or no job creation over the next 1 to 3 years, and in fact suggest there will be more layoffs coming.  The respondents see too much uncertainty in Washington, DC, too many regulations and a number of other matters (i.e., the deficit, debt, health care and taxes) as significant impediments to job creation.  This on the heels of a disappointing jobs report for June 2010, downward revisions of the number of jobs created in April and May, and unemployment rising to 9.2%, this Chamber survey only piles on the continuing terrible news for the economy.  With Congress bickering over the obvious — namely that we simply cannot spend money we don’t have and need to start spending less than we bring in to cut the deficit — it doesn’t seem there is likely to be any good news on the horizon.

This combined study represents a true look at small businesses.  The mean number of employees for businesses surveyed was 27, the mean revenue was $3.4 million annually, but the survey was made up of 28% of businesses with less than $250,000 in revenue and 20% of businesses with between $250,000 and $999,999 in revenue on an annual basis.  Furthermore, a slim majority — 51% — were businesses who have been operating for over 20 years.

With a margin of error of 3.3%, the survey finds:

  • Small business owners almost universally agree—by a 73% to 17% margin—that the climate of the last two years has hindered their growth.
  • 70% of small business respondents do not plan to hire new employees next year, and 9% will continue layoffs.
  • 80% of small business respondents said that the debt and deficit have a negative impact on their business.
  • 72% of respondents say the health care law has made hiring more difficult.
  • By a margin of 76% to 8%, small businesses surveyed believe that taxation, regulation and legislation from Washington makes it much harder for their business to hire more employees.

I have been closely watching the Patent Reform fiasco in Congress for several years and as a result I have pretty much lost faith in the ability of the federal government to do anything truly worthwhile.  The way legislation seems to be made and pushed forward would shock virtually everyone.  I don’t have a problem with lobbying per se, after all everyone — individuals and corporations alike — should have the legal right to lobby for things they think would be good or benefit them.  That is how a Republic ought to work.  Of course, the perversion comes in when the decision makers are so ill-informed that they don’t understand, or perhaps don’t really care, about the mischief they create.  Things get added to bills without any discussion at the last minute and that which everyone in the industry understands to be unambiguously good seems the least likely thing to be enacted into law.  Astonishing!

Thankfully, there are at least some who understand what needs to be done.  Earlier today The Hill published an article by Congressman Robert Andrews (D-NJ).  The article talks about jobs and concludes that one of the problems is that the banks are simply not lending.  That is an enormous problem for both individuals and businesses, particularly small businesses.  I understand that irresponsible lending is one of the main causes of the Great Recession, but when those who have high credit scores and who have never missed a payment of any kind cannot get a loan there is a problem.  I know first hand that never missing a payment means nothing today.  Like virtually everyone I have had my personal credit card limits reduced, had my business line of credit reduced and was told not to even bother applying for a loan for a home improvement project because no one was getting loans.  Unless and until this changes there will be little anyone can do.  The responsible consumer spending we need requires access to capital, which is still hard to come by.

Congressman Andrews also writes:

We need to reignite demand, by developing industries-like clean energy manufacturing and innovative medical technology- that will employ Americans whose jobs have evaporated and reappeared overseas. We should stop sending a billion dollars a day to Middle Eastern oil monarchs and use that money to employ Americans in developing solar, wind, hydrogen and other domestic energy.

Amen!  This very point was made by Hank Nothhaft and David Kline in their recently published book Great Again.  Over a generation we have given up on American manufacturing, which is responsible for the erasing of the middle class in America.  We chose to rely on intellectual property rights instead, but if you outsource manufacturing the follow-up intellectual property will be owned by those manufacturing overseas.  This is terrible because for every innovation there will be about 4 other downstream innovations that build upon and transform the underlying innovation.  So now we are effectively outsourcing our intellectual property as well.  Friends, there will be nothing left soon!

But why aren’t we competing with manufacturing?  Simple — corporate taxes are too high.  According to the World Bank the United States ranks 62 in terms of tax policy for businesses.  According to Nothhaft and Kline, the U.S. also faces “the highest corporate income tax rate in the world (save for Japan) — one that’s a whopping 50 percent higher than the average corporate tax rate in Europe.  They go on to explain:

So beginning in the late 1990s, most nations around the world began lowering their tax rates — and they have kept on lowering them ever since.  Germany, for example, reduced its corporate tax rate from 38 percent to 30 percent.  The United Kingdom lowered its from 30 to 28 percent, and in 2010 decided to lower it still further to 24 percent by 2015.  Israel reduced its rate from 34 to 21 percent in 2006, and then to 29 percent in 2007, 27 percent in 2008, 26 percent in 2009, and 25 percent in 2010.  Hungary, New Zealand, Poland, Korea, India, Malaysia — all have cut their tax rates in recent years.  Ireland’s tax rate is only 12.5 percent today.

Not so in the United States, where combined federal and state tax rates now average a whopping 39.2 percent.  The Milken Institute estimates that simply reducing the corporate tax rate to the average found in Europe and other OECD countries would generate more than 2 million jobs and increase total GDP by $375 billion, or 2.2 percent, by 2019.

Even former President Bill Clinton is in favor of cutting corporate taxes.  He recently said: “we should cut the rate to 25 percent, or whatever’s competitive, and eliminate a lot of the deductions so that we still get a fair amount, and there’s not so much variance in what the corporations pay.”

Those who will complain that the corporate tax rate is not too high simply don’t know what they are talking about; and that characterization is being kind.  Yes, General Electric (GE) famously didn’t pay any federal taxes last year, but that is exactly indicative of the problem.  They made over $14 billion in profit worldwide, with over $5 billion in the U.S. alone, and not only didn’t pay anything but booked a substantial tax benefit for next year.  Outrageous!  We need to lower the corporate tax rate and get rid of the loopholes.  Huge companies like GE and so many others can hire a team of the best tax lawyers to go through the tens of thousands of pages that our tax code has become to pay little or nothing.  Can small business, who are primarily responsible for job creation, do the same?  Of course not!  So the engines that drive the economy get blasted with high taxes while the mega-giant corporations pay nothing.  The playing field is uneven and unfair!

While the Republicans would like to believe the America Invents Act (i.e., patent reform) is a jobs bill, there is nothing there that will create any jobs, and quite likely provisions that will stand in the way of job creation.  So rather than just labeling something “a jobs bill” let’s actually get to work and create a coherent national strategy for job creation.  Here is the plan:

  1. Lower taxes on corporations, making it attractive to start a business in the United States.
  2. Stop the NLRB from going after U.S. companies that choose to open facilities in another State.  After all, if they chose to open up overseas the NLRB couldn’t do anything about it.
  3. FUND THE PATENT OFFICE!  The only part of the America Invents Act that could in any way be characterized as job creating was the so-called Coburn Amendment that would allow the USPTO to keep the user fees it brings in.  That would allow for more hiring and much faster patents, which would dramatically benefit the economy.  It is just icing on the cake that it wouldn’t cost taxpayers a dime.  Sadly, the House of Representatives gutted the Coburn Amendment, leaving the USPTO hanging.
  4. Stop passing bills that are multiple thousands of pages long.  No one reads those bills and they include all kinds of intentional and ridiculous provisions, not to mention unintended consequences.
  5. Stop passing bills that require many thousands of pages of new regulations.  This only freezes businesses as they wait for the delegated Agency to create the regulations.  Of course, those new regulations will also, when in place, cost businesses significant amounts of money to comply with.
  6. Stop spending money we don’t have.  Simply stated, the remedy for out of control spending is NOT to spend more.
  7. Cease any and all discussion of tax increases until the economy is growing again at a meaningful rate.  Yes, taxes increased during the Clinton years, but taxing a rising economy is not the same as taxing a stagnant or receding economy.  We learned during the Reagan years what reducing tax rates and broadening the tax base does, which is spur the economy.  We need to do that again, this time without the associated increases in spending by an irresponsible Congress.
I have no faith that any of this will happen, but know it should.  How depressing.
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Posted in: Congress, Gene Quinn, IP News, IPWatchdog.com Articles, US Economy

About the Author

is a Patent Attorney and the founder of the popular blog IPWatchdog.com, which has for three of the last four years (i.e., 2010, 2012 and 2103) been recognized as the top intellectual property blog by the American Bar Association. He is also a principal lecturer in the PLI Patent Bar Review Course. As an electrical engineer with a computer engineering focus his specialty is electronic and computer devices, Internet applications, software and business methods.

 

7 comments
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  1. Gene, that was way to depressing. Stick to IP and leave the politics alone. I agree that lowering taxes spurs the economy, but I think you are misconstruing the implications of small businesses. Our economy went through a business correction. Jobs are still lagging behind. Hold on to your coat tails for when the job numbers do improve. We are in for a big boom – provided the government doesn’t exploit the situation and siphon off everyone’s personal disposable income – that’s the key!

  2. Great article. I personally am in favor of eliminating the income tax altogether,and replacing it with something along the lines of the “FairTax” (a national retail sales tax). There are so many things fundamentally wrong with the income tax, including invasion of financial privacy, cost and complexity of compliance (defining and calculating “income” is still difficult even if the tax rate is flat), corporate taxes which we all ultimately pay for as consumers and investors, exacerbation of the trade deficit leading to offshoring of US jobs, and so on.

  3. Gene,

    My younger brother Steve has convinced me we need to go to a value added tax (VAT) and get rid of corporate taxes completely. In fact, the US is at global economic disadvantage because, for example, Europe has a VAT and we don’t. By having a VAT, we could adjust the VAT to make sure our domestic industries are on an equal footing with their global competitors in terms of exports (other countries with a VAT do this for their domestic industries), and not run afoul of the GATT. Just a thought.

  4. We need something more revolutionary. It’s time to transfer the bulk of legislative and taxing authority back to the states. The fed govt is too corrupt and bloated. The fed govt should be limited to tariffs on imports as it was originally -no direct taxes!

  5. The FairTax is like a VAT, only better. It taxes all new goods and services only once, at the retail point of saie, whereas a VAT is applied at every stage of production, making it more complex and burdensome, and less transparent. And the total cost of the VAT gets passed to the end consumer anyway. The FairTax also has exactly the same benefit as a VAT in terms of trade competitiveness. Businesses and jobs would come flowing back into the US. The FairTax also delegates tax collection to the states, with reimbursement out of the revenues to cover the adminstrative costs.

  6. Next-

    What do you mean by “misconstruing the implications of small businesses”?

    -Gene

  7. Hear hear!

    We need a tax “reform” act of 2012

    So far, I have seen only one “fair” proposal …

    (It’s the one where I don’t get taxed at all and you get taxed double ;-) )