The Neglected Self-Starter

At this time when the need for jobs and enterprise tops the national agenda, we not only ignore one of the major sources of new jobs and businesses in the economy, but we actually penalize their creation.

By Bob Friedman

Tagged entrepreneurship

2225149388_a88013ff96_m.jpgAmong the very good provisions of the American Jobs Act (AJA) are some that recognize the real job creators of the American economy: the self-employed, and even the unemployed, who often realize the only way they‘ll become employed is to create jobs for themselves. AJA includes pathbreaking provisions for a Self Employment Tax Credit, extends the Self Employment Assistance program to unemployed people in all 50 states, and adds self-employment training and support to re-employment programs. The likely result if passed: hundreds of thousands of new jobs, targeted to those who need them most.

The bill would be a first step towards addressing one of the great ironies of public economic policy in the United States—that at this time when the need for jobs and enterprise tops the national agenda, we not only ignore one of the major sources of new jobs and businesses in the economy, but we actually penalize their creation.

As the National Bureau of Economic Research and the Kauffman Foundation have recently reported, businesses under one-year old—startups—have created an average of three million new jobs each year for 30 years, more than the net job creation of the whole economy. A big proportion of those jobs are by self-employed entrepreneurs who don’t have any employees. Each year some 22 million Americans file Schedule C to report self-employment income, two million of them for the first time. Half of these filers report family adjusted gross income of less than $50,000

And yet, despite contributing millions of jobs to the U.S. economy, such businesses are all but ignored by policy-makers. They have no associations or lobbies. They are largely left out of the agenda of the President’s Start-up program, which focuses only on rapidly growing, often older firms, which can take venture capital investment and pay handsome returns. Small business groups focus on the agendas of small firms while the Chamber of Commerce and others focus largely on the perceived needs of big businesses. States still focus on luring large, established firms.

This neglect is a problem. The self-employed already face numerous obstacles; not receiving any attention from policy elites only hampers the small-scale entrepreneur’s ability to get off the ground. One hurdle is the lack of access to capital for low-income entrepreneurs. Granted, some actors have tried to fill the void. The U.S. microenterprise industry, composed of hundreds of local microenterprise development initiatives, a growing number of state microenterprise development associations, and national organizations, has worked to provide recognition, assistance, and supportive policy to low-income entrepreneurs. Our best estimates show that microcredit provides assistance to 250,000 low-income entrepreneurs annually, and loans to fewer than 10 percent of them. This is a significant—and growing—contribution. But the fact remains that this is a small percentage of both the 11 to 15 million small businesses operated by low-income entrepreneurs and the million plus new firms started each year.

Even worse than neglect, however, is outright harm. The fact is that public policy imposes substantial burdens and penalties on these vital entrepreneurs. Self-employed entrepreneurs are required to file Schedule C and pay employer and employee shares of FICA taxes equaling 15.3 percent of revenues, as well as back taxes and penalties, even though it is extremely difficult to project profits and tax liability a year ahead of time. New entrepreneurs are required to file Schedule C and pay payroll taxes even if they make only $400, often less than the cost of tax preparation (at that level they will not even receive Social Security benefits). Meanwhile, the IRS has traditionally prohibited most nonprofit tax preparers from assisting these entrepreneurs with their Schedule Cs. No wonder some four to six million businesses remain outside the formal economy and the reach of the tax system, unable to benefit from the tax benefits, credits, and deductions available to formally registered businesses, and denying the public coffers an estimated $15.9 billion in annual tax receipts.

Clearly, reform needs to happen to grease the gears of the entrepreneurial economy and help millions of the self-employed—and millions more who aspire to be. In recent years, CFED—the national nonprofit I started to insure that every American has a realistic opportunity to start a business, go to college, buy (and keep) a home, and provide a future for themselves and their families— the National Community Tax Coalition, and other local and state partners have begun to draw the curtain for these start-up businesses, providing tax and Schedule C prep assistance as a doorway to the mainstream economy. Last year the Self Employment Tax Initiative helped more than 33,285 entrepreneurs claim more than $30 million in refundable tax credits and save more than $11 million in tax preparation fees. Twenty-one percent of these entrepreneurs were first time filers; more than half survived solely on their self-employment income. Thirty-three percent were Latino, 27 percent African-American, 27 percent white, 5 percent Asian and 1 percent Native American. As a result of associated policy advocacy efforts, the IRS has begun to allow Volunteers In Tax Assistance—an IRS tax assistance program—to prepare Schedule Cs.

But much more needs to be done. Policy-makers need to refocus their efforts on the millions of Americans who are or would be self-employed and who don’t have the resources to deal with the demands of our regulatory bureaucracy.
The American Jobs Act would be an important first step toward eliminating barriers to new business creation. But we should not stop there. As Congress considers the bill’s different provisions, they should consider the following proposals:

Create a “Self Employment Tax Credit” that permanently expands the payroll tax cut for new businesses, providing a one-year payroll tax holiday followed by one year at the lower 6.2 percent rate provided in the Jobs Act.

Enable and encourage would-be entrepreneurs to save for their ventures by making the Saver’s Credit refundable and available for business creation. Most new businesses are financed out of personal savings and the savings of family, friends and associates. Lack of savings is one of the most likely causes for depressed new business formation rates.

Allowing beneficiaries of all public support programs, from welfare to unemployment compensation to Social Security, to pursue self-employment without abruptly losing benefits.

The American economy performs best when it releases and supports the energy, vision and talents of all of our people. Indeed, if you look at our history, the policies that have created widely shared, long-term, sustainable economic growth have been policies like universal education, the Homestead Acts, the creation of the 30-year fixed rate mortgage (by the federal government), and the G.I. Bill, which invested in the common genius of the American people. Our economy is faltering now because we have locked out the mainstream. Let’s re-open the doors to the economy.

Photo Credit: Seven Morris

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Bob Friedman is founder, chair, and general counsel of the Corporation for Enterprise Development, a 32-year-old non-profit dedicated to expanding economic opportunity by treating low-income people as producers and creators of wealth, not just consumers.

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