The debates in the class war classifies wealth in the extremes. We hear about Wall Street billionaires and the unemployed but we miss the vast majority in the middle.
We sometimes refer to them as the working wealthy. Most small business owners are in more common businesses such as service providers, welding shops, dry cleaners, small restaurants, auto repair shops, and retail stores. This is a far distance from great innovators such as Apple and Facebook.
Most small businesses compete in a game of inches. They compete with many similar businesses and face many uncertainties. When extending credit we note how many potential customers are a single truck wreck or a divorce away from bankruptcy.
In a game of inches you get little credit for doing things right but you face stiff penalties for doing anything wrong. A single workmen’s comp case, an EPA law suit, a sudden rise in health insurance cost or property and casualty insurance, a jump in fuel prices, a change in the bank’s credit policy, a single customer’s default, or any number of unexpected and unplanned events can mean the difference between profit and loss, survival and bankruptcy.
These friction costs are well known to business owners. The government is often the biggest source of these friction costs. Not only does the prospect of higher taxes threaten a small businesses future, but increased regulation can have just as big an impact. Even worse is the fact that the laws and regulations you must abide by change so much that you can never measure the impact or benefit because so few have any confidence that the rules in place will remain in place. Tax cuts are passed with expiration dates, reducing any long term impact, but onerous regulations remain forever and just grow in number and complexity.
We are seeing doctors leave private practice to become hospital employees as the friction costs drive them from their businesses. The burdens of business ownership keep people from going out on their own and cause an increasing number to close. Most of these will never reopen.
A business owner with a Subchapter–S organization (a common structure) may make a taxable income of $250,000, making him wealthy in the arbitrary eyes of the president, but that does not mean he received $250,000 in cash compensation. He may have drawn a salary of $100,000 and the other $150,000 which is reported as TAXABLE profit was reinvested in accounts receivable, inventory or capital equipment. A 30% tax on $250,000 is 75% of the actual cash he draws as salary in this example. The means that growth either requires extraordinary profits that few have, increasing debt, or paltry cash returns for many businesses.
Job growth is weak because friction costs are high. It is really that simple.