May 19, 2013 0
I meet every couple of months with a couple of small groups of diversified small businesses in the Southeast.
Here is what I am hearing.
Few are making any significant capital expenses. Taxes are too high and conditions are too uncertain. These small businesses run with the purpose of minimizing a profit. This means that they may rent a fancier office space than they would normally, furnish it nicer and buy more expensive company cars. Why? Because this maximizes their benefit AFTER TAX. They would rather spend $10,000 more on a company car than show the $10,000 on the bottom line and then give half of it to the government.
This is how small private companies think. This is the opposite of the way public companies think.
This same thinking is exhibited in estate planning. Consider a successful businessman in his fifties. He has accumulated a net worth of roughly ten million dollars. He is clearly well off but not private jet, Bentley driving, mansion occupying wealthy. In fact most of these people drive their cars for several years , go to their children’s ball games and generally lived relatively modestly in order to grow their business. They are generally not conspicuous consumers.
But looking at their position and thinking they may live another 30 years they realize that this comfortable cushion will double and triple with just modest investment returns, and that this will put them in a very high estate tax bracket.
They will set up trusts for their kids and their preferred charities, but they will still likely face significant estate taxes. They are thinking that if they leave the financial assets to grow the government will benefit, not their family. So they start to think like conspicuous consumers. They will buy the expensive boat and tangible items like jewelry and collectibles that they can just hand to their children or family members.
At first they feel guilty, because they are not used to this way of thinking. They have been used to postponing consumption and sacrificing to grow their business. But when they realize that the alternative is to lose that money to government confiscation they quickly adapt.
Some think this is a good thing- that forcing them to spend their money is immediately stimulative to the economy, but that is very short sighted. We benefit far more when they invest those funds in businesses that increase the GDP. This not only creates jobs that are sorely needed, but it also creates the revenue stream that the government so desperately seeks.
During the 1970s inflation drove financial returns into higher tax brackets. Investors sought inflation protection in tangible assets. When inflation was tamed in the 1980s this money flowed heavily back into financial assets and fueled the stock market boom and growth in the GDP for the next 25 years.
Today the problem is not inflation; it is the fear and reality of increasing taxes and stifling regulation. Investment capital is going to less productive uses, driven by tax avoidance.
One businessman commented that the penalty for not buying health insurance is higher than the profit he currently generates per employee. Alternatives in his competitive industry are few. His competitors with fewer than 50 employees, who do not have to comply with the health insurance requirement, will have a distinct advantage. What an anti-growth policy!
Another commented that what was once a mistake in running a business is now a crime. Whether it is immigration, environmental, health care compliance, or infinite state and federal regulations, a business owner is assumed to be malicious in his intent and actions. Fewer owners will want to take the risk of deploying their capital in illiquid small companies, only to be branded a criminal.
Larger businesses with big administrative staffs are better able to manage the regulatory maze. Very small businesses with only a few employees can manage to stay off the grid. But the businesses starting to require significant capital investment with 50 or more employees is bearing the brunt of the regulatory damage. This has always been true to some extent but the increased regulatory burden has made this worse. This is the economic sector that provides next year’s Apples, Dells and Fords- and most of the new jobs.
This has been the picture for four years, and even I get tired of small business people including myself whining about it. Since the last election we have had to accept a realty that we wish was different. These small but successful business people will change their behavior even if they are not professional golfers from California. The greater good, which the dominant leaders so promote, will suffer from the actions these small business people will take to minimize the damage from the policies of this administration.