Mike Kropf/Richmond Times-Dispatch via AP
Vice President Kamala Harris, left, and Ekene Tharpeat look at some produce at Babylon Micro-Farms for Small Business Week in Richmond, Virginia, May 4, 2023.
The post-pandemic period has seen an explosion in individual entrepreneurship. According to a Treasury Department report released this week, 71 percent of net new jobs since 2019 came from small businesses (by comparison, after the Great Recession that number was 64 percent), and new business applications are up by 50 percent in 2024 compared to five years ago. Over 19 million businesses have been formed since Biden’s inauguration, and these are not just sole proprietorships or fly-by-night operations. The subset of applications for businesses most likely to hire employees has increased 30 percent from 2019.
You can debate what led to this, but I’d put my money on a change in mindset. I’ve written before about people’s desire to find purpose in work and set their own path. Technological and logistical barriers to starting e-commerce enterprises have dropped as well. The zero-interest-rate policy of the pandemic helped reduce startup borrowing costs, but in the last two years that has reversed as interest rates rose, and still people are starting businesses at robust rates (though lower than in 2021 and 2022).
I don’t know that I would put lower tax burdens at the top of the list. But Kamala Harris and her economic team clearly think this is holding small businesses back. In a speech yesterday in New Hampshire, Harris proposed a tenfold increase in the startup-expense tax deduction, from $5,000 to $50,000. So salaries for new workers, training, publicity, and other outlays before a business is operational can be deducted at a much higher rate.
The pitch included some other perks for small businesses, included easier occupational licensing rules across state lines and simpler tax filing. Harris’s goal is to boost that new business formation number up to 25 million in her first term.
I’m certain that no small-business owner would look at a bigger startup-cost deduction and reject it; it’s basically free money. It’s not much money, to be clear. A 2018 bill that expanded the deduction to $20,000 (which Donald Trump supported) was projected to cost $2.8 billion over a decade; maybe Harris’s version would be $7 billion. The New York Times estimated it slightly higher, at $20 billion. That’s still not much.
I’m less certain that any small-business owner was clamoring for this. We actually know quite a lot about what small businesses worry about, because a number of organizations periodically survey them. And a tax deduction on the back end isn’t the concern; it’s access to credit on the front end.
The surveys generally show heightened optimism from small-business owners about hiring and investment; the National Federation of Independent Business survey shows its highest level in two years, mainly due to reduced inflation. The U.S. Chamber of Commerce/MetLife survey is at a record high.
But one drawback has been the tightening of small-business credit standards from lenders throughout most of President Biden’s term. Small businesses often have trouble getting credit because their enterprises are simply riskier than large corporations, and higher Federal Reserve interest rates have raised the bar even higher. This has turned around a bit in 2024 and is a big reason for the optimism. But credit standards are still seen as tight.
If you look at what small-business organizations say they actually need, like this 2025 agenda from the Main Street Alliance, outside of a banal ask for tax fairness, discussions of the tax code are virtually nonexistent. The Main Street Alliance wants Congress to pass paid family and medical leave and investments in child care, maintain enhanced subsidies for health insurance on the Affordable Care Act exchanges, and support antitrust enforcement to ensure fair competition for their smaller businesses. And local economic development, including access to capital financing, is on the list as well, critical to “ensuring that new entrepreneurs have the resources they need to start and expand their businesses.”
The bottom line is this: You cannot very well enjoy benefits from a tax deduction for startup costs if you can’t get your hands on the money to start up a business in the first place.
To be fair, Harris’s plan also envisions a “small business expansion fund” that would cover interest costs for small businesses that expand into areas with low levels of investment. (An expansion fund is nice but doesn’t help unless the businesses can actually start.) She also announced support for more funding for community development financial institutions (CDFIs), which typically offer loans in overlooked or left-behind communities. CDFI support would be critical, because lending standards, not necessarily interest costs, appear to be the main hurdle. But this apparently would only apply to small businesses in rural America and “underserved” communities; there are people all over America who need a broader base of lenders willing to give a chance to small businesses.
The phrase “small business” is sometimes incanted with totemic significance in Washington, revered in the way that already earns them exemptions from many regulations and tax benefits. Individual proprietorships already enjoy a huge (and largely unearned) tax break for pass-through businesses that was part of the Trump tax cuts. Maybe yet another tax cut is warranted; maybe not.
But these benefits and exemptions aside, the idea that the oppressive hand of the IRS is still making it nearly impossible to start a business is contradicted by the incredible statistics on business formation in the post-pandemic era. And if Harris’s idea of small business correlates with the tech entrepreneurs funding her campaign, this focus could end up being dangerous, especially if it’s just a means to allow startups to exit to Big Tech, earn riches, and consolidate their industry.
I’ve said before that, unlike Barack Obama’s pretend “team of rivals,” where everyone shared the same neoliberal premises about the economy and the world, Harris seems like she’s building a real one. She has attacked corporate price-gouging and not relented despite economist pushback, even running a new ad on the subject this week. She’s offered pleasant-sounding gimmicks like eliminating taxes on tips that would drain the revenues needed to pass other parts of her agenda, like care economy measures. And she’s proposed things like this tax deduction, which seem off base from the problem small businesses face. Even in housing, an issue she’s leaned into most vigorously, she’s advocated both supply- and demand-side policies simultaneously. (I don’t begrudge that necessarily; there’s room for both. But it speaks to this dynamic.)
Campaign white papers don’t necessarily correspond to governing agendas. With Harris, the true direction of that agenda remains in flux.
