Four future headlines about the new tax law
The Tax Cuts and Jobs Act (TCJA) is now an official part of the U.S. tax code. As you may know, since April 2017 I twice warned in this space that the legislation was going to favor Wall Street over Main Street businesses.
My last column on this topic was a “good, bad and ugly” analysis after the TCJA became law, as it would be applied to business tax returns. Clearly, for most individuals and businesses, the new law is good news, because lower taxes means more cash to be spent. But unlike consumer purchases, when businesses deploy tax cuts, that money produces a competitive dynamic which is being disrupted by the TCJA. And for small businesses, there’s the rub.
In order to demonstrate how this disruption might continue to play out, I’m forecasting how the media will cover it. First, you’ll find a projected headline, then an associated first paragraph, and finally my thoughts on the impact on small businesses, most of which are structured as pass-through entities (Sub S corporations and Limited Liability Companies).
April 2018: GDP Jumps on One-time Corporate Employee Bonuses
First paragraph: “GDP jumped in Q1 as hundreds of U.S. corporations, buoyed by prospects of an impending cash windfall from the TCJA, delivered four-figure bonuses to hundreds of thousands of employees. Besides the obvious benevolence, it also resulted in positive PR within and without these organizations. But some firms went even further by establishing higher starting pay going forward.”
Small business impact: Obviously, small businesses benefit from GDP growth; it’s part of the rising economic tide. But they would also like to be as generous to their employees and accrue the positive PR. However, since their tax cut was a qualified, 20% deduction, not a 40% tax cut, this competitive dynamic lever is beyond the grasp of six to eight million small businesses.
June 2018: TCJA Delivers New-Hire Leverage for Corporations
First paragraph: “In addition to the one-off bonuses employees of hundreds of large businesses received following passage of the TCJA, the found-money from a significant tax cut is also helping large employers sweeten offers to prospective new-hires.”
Small business impact: Once, it was taxes, and then health insurance costs. Today, polls indicate the number one challenge for all employers is acquiring qualified employees, a crisis even before unemployment reached the current, “full employment” levels. So, in a seller’s (employee) market, what’s the obvious buyer’s (employer) solution? Offer more money and let the poaching begin.
The qualified-employee crisis is no respecter of business size, and all businesses fish in the same prospective-employee pond. It’s true that small firms have always been at a disadvantage when competing for talent against big business benefit packages. But now, with more money in their bidding fist, big business’ hiring advantage just got a lot bigger. And this disparity is beyond hiring to replace turnover. Small businesses report their second greatest challenge is the inability to grow due to lack of available talent for staff increases. Alas, the TCJA provides paltry small business relief here.
September 2018: 2018 Tracking as Record Year for Consolidation
First paragraph: “For almost a decade, corporate America enjoyed cheap money as the Fed held rates at record lows, allowing consolidation within and across industries. With interest rates rising, Fed assistance is being replaced by a much better source: the TCJA 40% corporate tax cut. And it’s resulting in a record year for consolidation and acquisition – without the debt.”
Impact on small business: For the past 30 years, large businesses cut payroll and found efficiencies by outsourcing non-core competency tasks to small businesses – a very good thing. But consolidation disrupts long-standing contacts and vendor/partner relationships small businesses work hard to earn. Organic consolidation is part of marketplace natural law. Contrived consolidation arising from tax cut found money produces unnatural and inequitable disruptions. And consolidation isn’t the domain of big business. Small businesses also have organic and strategic growth plans – and we, too, would rather not borrow the money.
December 2018: The Coincidence that Disrupted Main Street Retail – Forever
First paragraph: “Large e-tailers increase their foothold on America’s Main Street economy with the benefit of coincidental events: 1) The historically unprecedented retreat from Main Street by dozens of legacy retailers, like Sears; 2) With funds from TCJA cuts, 21st century firms, like Amazon, have moved into that Main Street vacuum by deploying significant new investment in digital leverage, including sexy and compelling e-commerce features from expanded big data and analytical resources.”
Small business impact: For generations, the prime advantage of large firms was scale and innovation – a bigger selection of new offerings, widely distributed at low prices. For over a century, Sears-Roebuck was a competitor to be reckoned with, but didn’t render the small retail model obsolete. That was then.
In the Digital Age, scaling isn’t just about more stuff faster and cheaper. Companies like Amazon spend less on physical assets and more on digital levers – like more and better algorithms – that put the competitive dynamic in an orbit difficult to attain by a small business. All of the foregoing is a market-based scenario, which small firms understand and have learned how to compete against. But when an inequitable tax cut disrupts the competitive dynamic, that’s a clear violation of what surely should be the government’s prime directive: Don’t pick winners and losers.
Small businesses don’t begrudge big business their tax cut. But we’re not children of a lesser god. We should be treated the same as any other business entity.
Write this on a rock …
It’s difficult enough to compete as a small business without the government’s thumb on the scale of the competitive dynamic.