Martin A. Sullivan (Tax Analysts), Start-Ups, Not Small Businesses, Are Key to Job Creation, 134 Tax Notes 158 (Jan. 9, 2012):
In an October 23, 2011, op-ed in The New York Times [Small Isn’t Always Beautiful], Jared Bernstein neatly laid out some earthshaking facts. The former economic adviser to Vice President Joe Biden summarized recent research that says small business is not the engine of job creation that politicians and the press repeatedly claim it to be. "To the extent that size matters at all for job growth, it's really about new companies that start small," he wrote.
Underlying Bernstein's claims is the work of current and former Census Bureau economists who found "no systematic relationship between net [employment] growth and firm size." (See John Haltiwanger, Ron Jarmin, and Javier Miranda, Who Creates Jobs? Small vs. Large vs. Young, NBER Working Paper 16300, Aug. 2010.) …
[T]here are the conservative economists who agree that small businesses are not special when it comes to job creation. Veronique de Rugy, formerly at the American Enterprise Institute (AEI) and now at the Mercatus Center at George Mason University, agrees with Haltiwanger. "The conventional claim about small businesses' job creating rests mainly on statistical fallacies and misunderstanding of the data," she says (Are Small Businesses the Engine of Growth?, AEI Working Paper 123, Dec. 8, 2005). De Rugy cites conservative icon Milton Friedman (Friedman, Do Old Fallacies Ever Die?, J. of Econ. Lit., Dec. 1992). She concludes that "the claim that small businesses are the fountainhead of job creation does not hold water." Similarly, Alan Viard and Amy Roden of AEI write that "the most common argument for preferential treatment of small business — its uniquely powerful role in job creation — does not stand up under scrutiny. . . . Careful statistical studies do not assign any special role to small firms." (See Big Business: The Other Engine of Economic Growth, June 23, 2009, available at http://www.aei.org.)
The work of Haltiwanger and his colleagues deserves more attention because it is standing up to the scrutiny of other professional economists. In other words, it appears that it will be one of those economic claims subject to endless debate. For example, University of Chicago economists Erik Hurst and Benjamin Pugsley build on Haltiwanger's research (What Do Small Businesses Do?, NBER Working Paper 17041, Oct. 2011) and join the emerging consensus view. …
The Kansas City, Mo.-based Kauffman Foundation has devoted a considerable portion of its $2 billion in assets to studying and promoting entrepreneurship. Based on research similar to Haltiwanger's, the foundation's numerous publications repeat the finding that new firms — not small firms — are the source of almost 3 million net new jobs that on average are created in the United States each year.
All this tells us that perhaps the best economic case for keeping the top individual rate at 35% is the benefit lower rates would provide to all sectors of the economy. But that bland economic reasoning does not connect with voters the way a story about struggling small business does. Republican politicians will never make that mistake. That would be surrendering their most potent weapon in the battle to extend the Bush tax cuts. Better to upset a few economists than lose the support of the public, which has been taught to equate tax increases for the wealthy with tax increases for small business job creators.
All Tax Analysts content is available through the LexisNexis® services.
