PROTECTING SMALL BUSINESS, PROMOTING ENTREPRENEURSHIP

Attacking U.S. Partnerships Means Attacking U.S. Small Business

By at 18 March, 2024, 6:26 am

by Raymond J. Keating –

Whenever elected officials set off on spending sprees, their targets for higher taxes, of course, expand.

We’re in the midst of such a period now, as President Biden’s budget plan calls for federal outlays to persist at an annual minimum of 24.6 percent of GDP into the future (ranging from 24.6 percent to 25.3 percent from FY2024 to FY2028). This would be unprecedented in U.S. history for any extended peacetime period. Consider that over the four decades prior to the pandemic, for example, federal outlays as a share of GDP averaged 20.6 percent.

This dramatically higher level of federal spending would do damage to the U.S. economy by draining resources, via taxes and/or debt, from the private sector.

Among the targets being considered for increased scrutiny of, and taxes on, are partnerships. Make no mistake, though, increasing government’s burden on partnerships means harm for small businesses, and the ill effects would be felt far and wide throughout the economy.

For example, a study prepared for the Small Business & Entrepreneurship Council titled Economic contribution of partnerships in the core living expenditures sector in 2023 looked at the role that partnerships play in “providing Americans with core living expenditures that help many lower- and middle-income households maintain a basic standard of living.” The study looks at consumer-facing businesses, which are defined as “businesses that provide the goods and services generally considered necessary to maintain a basic standard of living in the United States.”

According to a 2021 analysis by the President’s Council of Economic Advisers (CEA), core living expenditures primarily are covered by consumer-facing businesses providing housing, transportation, food, health, child and elder care, clothing, and education. It also was pointed out, “Core living expenditures represent 70% of the annual expenditures for all consumers and 80% of average annual expenditures of consumers in the lowest quintile of the pre-tax income distribution in 2022.”

Among the study’s key findings were the following: “The total economic contribution of partnerships in the core living expenditures sector in 2023 was an estimated 10.6 million workers earning $779 billion in wages and benefits and generating $1.3 trillion of GDP in the United States. The total economic contribution, or economic footprint, of partnerships in the core living expenditures sector consists of the operations of partnerships in the core living expenditures sector in the United States, as well as the related supplier activity and consumer spending.”

Obviously, increasing taxes and compliance red tape on partnerships will increase costs in various ways for the Americans at all income levels in terms of their expenditures on core living expenditures.

Of course, the harm would not stop there. For example, it must be noted that targeting partnerships for higher taxes means targeting small businesses for higher taxes.

Harm for Small Businesses

Consider the breakdowns of partnerships by firm size. Across industries, partnerships overwhelmingly are small and medium-sized businesses. That’s clear in the following tables covering assorted industry sectors – from total partnerships to sectors including consumer-facing businesses to sectors including suppliers to consumer-facing partnerships. In addition, suppliers to consumer-facing businesses across business types (that is, not just limited to partnerships) also are overwhelmingly populated by smaller businesses. (Partnership data from 2020 while all employer firms data from 2021.)

Consumer-Facing

Related Consumer Spending – Partnerships

Suppliers – Partnerships

Suppliers – Total – All Types of Firms

Related Consumer Spending – Total – All Types of Firms

The U.S. economy is deeply integrated and intertwined. Tax increases targeted at one set of individuals or businesses not only have negative results for those targeted businesses, and their workers and customers, but those negatives spread far and wide to related businesses, workers and consumers. And no one should be surprised by the high level of small businesses in each sector noted in this analysis, as this is the reality that holds across most of our economy. That is, the U.S. economy overwhelmingly is a small business economy.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His latest books on the economy are The Weekly Economist: 52 Quick Reads to Help You Think Like an Economist, The Weekly Economist II: 52 More Quick Reads to Help You Think Like an Economist and The Weekly Economist III: Another 52 Quick Reads to Help You Think Like an Economist.

 

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