Oct. 27 (Bloomberg) -- Are Americans really preparing to vote on ``trickle-up'' economics?

This novel theory suggests that if government provided the lion's share of tax benefits to low- and middle-income Americans and small businesses, they would create more revenue, jobs and financial flexibility.

The U.S. presidential candidate who gets economic incentives right for small businesses is on to something powerful. For anyone earning less than $250,000, it could be the difference between falling further behind and future financial security.

I have recently seen three neighbors shutter local businesses and have wondered how federal economic policies might have helped them stay afloat and maintain their payrolls.

There's something to be said for giving breaks to shop owners, contractors and small manufacturers. Trickle-up policies provide more viable incentives than its obverse: supply-side economics. This fractured theory holds that the well-heeled will use their tax cuts to open businesses and employ workers. I have never seen any independent evidence that proves this is true.

Trickle-up economics, on the other hand, assumes that lower- and middle-class people eventually create jobs because they want to beat corporate salaries, hourly wages and benefits that are largely stagnant and not keeping up with inflation.

SBA Study

Those who leave the corporate world don't always succeed in entrepreneurship, of course. Most fail.

Yet those who make it will generate employment, pay taxes and anchor communities -- in many cases much more so than multinational corporations.

Durable small companies that do everything from manufacturing forklift parts to specialty contracting have been creating the bulk of new jobs in recent years. In contrast, most large employers have been slashing their payrolls.

It's the ``high-impact'' firms that have been creating jobs at a surprisingly robust pace over the past decade.

As defined by the U.S. Small Business Administration, these companies generally have fewer than 20 employees, are no more than 25 years old and represent about 3 percent of all firms.

According to an SBA study, small firms were hiring from 1994 to 2006. Most of the job losses in the U.S. economy were attributable to companies with more than 500 employees.

While business-page headlines announce massive cutbacks at large U.S. multinationals -- particularly in the auto and financial industries -- small firms have been better employment generators in recent years.

Small Firms

Firms with fewer than 500 workers had a net gain of almost 2 million new jobs in 2004 (the most recent year with available data) while large firms had a net loss of 181,000 positions, according to the SBA's ``Small Business Economy 2007'' report.

That deflates the conventional wisdom that the biggest companies create most jobs and are worthy of more tax breaks.

The U.S. employment picture is deteriorating as the credit crisis, housing bust and prospect of a recession act like a storm tide in the economy. Some 160,000 jobs were lost in September alone. About 2 million people were already out of work.

It's reasonable to assume during normal times that small businesses will outpace most large corporations in employment growth. There are simply fewer multinationals: Smaller companies numbered more than 370,000 as of 2006.

Which major party candidate plans to bolster the unsung job- creating force of small firms?

McCain's Policy

In his nomination acceptance speech on Sept. 4, Republican Senator John McCain said ``keeping taxes low helps small businesses grow and create new jobs. Cutting the second-highest business-tax rate in the world will help American companies compete and keep jobs from moving overseas.''

Specifically, McCain wants to keep the ``top personal federal tax rate at 35 percent, allowing first-year expensing of equipment and technology investments and establish a permanent tax credit equal to 10 percent of wages spent on research and development.'' He would cut the top business-tax rate to 25 percent, from a maximum 35 percent now.

The first two items are already in the tax code, so no significant change there. The R&D proposal is promising, but it would most likely apply to large companies. It's not clear if the tax-rate cut would apply to small businesses.

One of Democratic Senator Barack Obama's proposals promises a 50 percent credit for health premiums ``paid by small businesses on behalf of employees.''

Better Provision

Like McCain's plan, it would provide some incremental aid, but wouldn't directly reduce premiums or industry practices that charge outrageous rates for those with serious conditions.

A more enlightened provision in Obama's plan would create a ``low-cost national health exchange,'' which allows small employers to pool their risks better to lower costs. There's also a reinsurance program for catastrophic costs.

Missing in both candidates' programs are specific write-offs for payroll taxes and start-up fees. The self-employed, for example, pay both the employer and employee shares of Social Security, Medicare and federal levies. There are also many state and local expenses.

Obama indirectly addresses the payroll-tax issue through the offering of a $500-per-worker credit and $3,000 for each additional employee hired.

Although neither candidate can have any effect on state and local-business levies, both can better address health care.

Health premiums have doubled since 1999 while inflation has accelerated 29 percent, according to the Kaiser Family Foundation in Menlo Park, California. Medical expenses are punishing to the smallest firms, with only about half offering coverage.

If more people didn't feel shackled to their large employer for their group health plan, even more jobs would be created as workers could take more risks to start their own businesses.

That's a political idea I would like to see trickle up in a big way. You can't begin to have personal financial security without affordable, portable and universal health care.

(John F. Wasik, co-author of ``iMoney,'' is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: John F. Wasik in Chicago at jwasik@bloomberg.net.

Last Updated: October 27, 2008 01:01 EDT