September 20, 2014

Why Paul Ryan’s Budget is Better for Small Business

paul ryan

For the first time in years, the U.S. Senate and House of Representatives are simultaneously developing federal budget plans. While some small business owners will undoubtedly prefer the Senate’s plan to the House’s, the latter aligns more closely with the interests of a majority of small business owners.

The Senate’s proposal, crafted by Patty Murray, a Democrat from Washington, would trim the deficit slightly by boosting revenues through the elimination of tax loopholes on corporations and well-off individuals, while preserving current spending levels. The House’s proposal, written by Paul Ryan, a Republican from Wisconsin, would cut spending significantly to balance the federal budget in a decade.

Representative Ryan’s budget contains several items favored by small business owners, while excluding several disliked dimensions of Senator Murray’s plan. Small business owners largely favor his proposed repeal of subsidies for buying insurance under the exchanges established by the Affordable Care Act, and his effort to trim Medicaid’s growth.

The Small Business Outlook Survey (PDF), an online poll of 1,482 small business executives conducted at the end of 2012 by Harris Interactive on behalf of the U.S. Chamber of Commerce indicates that three quarters of small business leaders believe that the Affordable Care Act will raise their companies’ costs and 71 percent believe that the new law makes it more difficult for them to add workers.

The House budget proposal also would trade fewer tax deductions for a reduction in individual income tax rates, imposing brackets of just 10 and 25 percent in place of the current brackets. By contrast, the Senate budget proposal would increase taxes by eliminating deductions on the highest earning Americans.

Representative Ryan’s approach to taxes is consistent with the views of most small business owners. According to the most recent Wells Fargo-Gallup Small Business Index, 80 percent of small business owners believe that taxes are harming the “operating environment” of their businesses. Moreover, a recent poll of members of the National Federation of Independent Business (NFIB) shows that they “strongly prefer a tax code with lower rates and fewer preferences,” which is what Representative Ryan is proposing.

Representative Ryan’s budget also lowers the rate of growth of federal spending, which will boost economic growth in the long term. The non-partisan Congressional Budget Office (CBO) indicates that if the deficit were reduced by $4 trillion – Representative Ryan’s budget cuts the deficit by $4.6 trillion – real gross national product would be 1.7 percent higher in 2023 than it would be if current policies continued.

By contrast, if the deficit were reduced by $2 trillion – Senator Murray’s budget trims the deficit by $1.85 trillion – gross national product would be 0.9 percent higher than under current plans. In 2023, the economy would be at least 0.8 percent larger in inflation-adjusted terms if the Republican budget passed than if the Democratic one became law.

Small business owners favor higher economic growth, even if getting it reduces economic equality, because faster growth generally means greater sales. In recent years, weak demand for its products and services has been small business’s biggest problem.

The Republican’s budget would also balance in 10 years. A balanced budget would benefit small business by eliminating the risk of “crowding out” in financial markets, which could raise the cost of credit. Douglas Elmendorf, the Congressional Budget Office Director, explained to the Monetary Policy Forum at University of Chicago Booth School of Business in February that the federal debt could “crowd out” private investment if it grew from its current level to a much higher fraction of gross domestic product. The resulting higher interest rates would be a problem for small business owners whose ability to service their debt falls as interest rates rise.

Before they get too excited about Representative Ryan’s budget proposal, small business owners should keep one thing in mind: His budget has about as much chance of becoming law as we have of seeing a July snowstorm in our nation’s capital.

Paul Ryan Photo via Shutterstock

3 Comments ▼

Scott Shane


Scott Shane Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of nine books, including Fool's Gold: The Truth Behind Angel Investing in America ; Illusions of Entrepreneurship: and The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By.

3 Reactions

  1. Scott, you’re right on with your assertion about the Ryan budget. Fiscal responsibility is of paramount importance to our economy in the future. Printing more and more just devalues our currency. If businesses see some responsibility coming from DC, they might just loosen the purse strings a little bit and invest and grow. That will trickle down to the little guys like me and lots of other small business owners out there.

  2. I’m not an economist, Scott.

    But, lately, it’s come to my attention (on a couple of talk shows) that the deficit fears-at least short term, are kind of unfounded.

    They’re more politically motivated… etc. etc.

    I’ll stick with Paul Krugman.

    A lot of his views seem to be right on the money.

    He’s not in office, and he’s not running for office.

    His trust factor scores high with me.

    The Franchise King®

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