NEWS ANALYSIS : Rhetoric Fogs Budget’s Impact on Small Business, Jobs

As a symbol of American values, small business, like the family farm, is something politicians of all persuasions hold sacred.

And now, as Republicans and Democrats engage in the climactic struggle over President Clinton’s plan to reduce the federal deficit by raising taxes and curbing federal spending, each side is pleading its case by focusing in large measure on the purported cost or benefits of the plan to the nation’s small businesses.

Republicans, opposing tax increases that will fall predominantly on those with taxable incomes over $115,000, assert that the Clinton plan would jack up the tax burden on many small businesses, thereby stifling creation of new jobs. Small businesses generate far more new jobs than the giant corporations, they note.

Democrats, on the other hand, insist that relatively few small business owners--4.3% of the total--make enough money to be subject to the higher tax rate. Democrats also argue that the overall benefits to the economy of reducing the projected growth of the deficit will generate far more new jobs than the higher taxes could possibly eliminate.

Who is right?

While no one is certain, of course, most experts believe that when the haze of partisan rhetoric clears away, the legislation probably will not have much significant impact--either good or bad--on the particular kinds of small businesses that create so many good new jobs.

The vast majority of American businesses are individually owned, operated as partnerships, or in other arrangements in which the profits are considered taxable income for the owner. There are 7 million such businesses, but only 300,000 make enough money to be affected by the biggest tax hikes contained in the budget package.

This is the group whose tax rate would go to 36% when income exceeds $115,000 for individuals and $140,000 for married couples, and to 39.6% for incomes over $250,000.

Beyond question, the experts say, the role of small business in generating new jobs is enormous. Studies by economist David L. Birch, president of Cognetics in Cambridge, Mass., show that just 4% of U.S. companies--he calls them fast-growing “gazelles”--generated about 70% of the 2.9 million new jobs created in the past five years.

But there is a catch, Birch and others say: While some small businesses make huge contributions to new employment, many others do not. These firms are “mice”--they start small and stay that way.

And how you encourage the firms that are creating good new opportunities for skilled workers such as computer software designers and accountants--as distinguished from minimum-wage hamburger flippers--”is a very complicated subject,” in Birch’s words.

New taxes do affect the expansion plans of any company. But as a general rule, experts believe, if the basic line of business is hot--whether it is personal computers sold at a discount, health care services or temporary office work--the small companies in that line of work are likely to grow and create good jobs, regardless of how Congress tinkers with the tax code.

Conversely, enterprises that are not riding a strong economic wave are likely to prove anemic no matter how much government aid and protection they get.

Helping the economy get back on the growth track is the most important way to stimulate businesses, both small and large, argues John Paul Galles, executive director of Small Business United, which is backing the Administration budget proposal.

“It’s important for the debate to end, and to get things going again in the economy,” Galles says. “We can start the process all over, but who is to say the next package will be any better than this?”

Small businesses--officially defined by the government as companies with fewer than 500 workers--account for about 54% of the nation’s labor force and produce half the total output of goods and services.

Beyond these facts, there’s a scarcity of official government information about how many jobs are created by various enterprises.

Both Democrats and Republicans “are speculating” when they argue about whether the Clinton tax program is a boon or a bane for business, Birch insists. “We just don’t know,” he says.

The Administration’s insistence that only a handful of rich people will be hit offers scant reassurance to many individual small business owners, who are convinced that anything coming out of Washington--no matter how well-intentioned--is an unfair burden that will make their lives worse.

Max L. Hoskins, the president of Arrow Lift Rentals in Irvine, for example, says the money that he will pay in higher taxes “could be put back into the business and make it expand and grow.”

He was thinking of adding another worker and purchasing another truck for his firm, which rents out on a monthly basis “cherry picker” cranes that lift construction workers 20 feet and more into the air.

Expansion plans at the 16-member firm are on hold because of the impending higher taxes, and the additional uncertainty about “what Mrs. Clinton plans to do with health care,” Hoskins says.

Rich Brady, who owns a chain of clothing stores bearing his name in the San Diego area, says the higher individual tax rates will hurt him by making his customers hesitate before they buy new clothes.

“Unless somebody’s house burns down, he does not need to rush out and buy a new coat or a new suit,” Brady says. “I just sold a suit normally priced at $525, for $299, and the guy didn’t even think he was getting a deal.”

Brady worries that “people in California feel uncertain and don’t want to spend. Higher taxes won’t put them in a better spending mood.”