Second-Guessing the Stimulus Package

The House's economic stimulus bill contains much of what small business has always wanted, but it still leaves a lot to be desired

If Patrick Von Bargen had crafted the economic-stimulus package on the table in Congress, it would have included a measure allowing fast-growing companies to defer up to $250,000 in federal income tax payments for three years. Also, for people who invest in entrepreneurial outfits, he would have halved the capital-gains tax rate for at least 5 years -- and eliminated it altogether for such investments held 10 or more years.

During the last recession (1990-91), it was the fast-growth companies that added jobs first, says Von Bargen, executive director of the National Commission on Entrepreneurship. "It looks as though the real economic activity is in those companies this time as well," he says, pointing out that while total third-quarter venture-capital investment ($7.7 billion) was dismal compared with such investments in the previous two years, it remains high when judged against any year prior to 1999.


  The economic-stimulus legislation recently passed by the House and now being debated in the Senate contains many items that have long been on the traditional small-business lobby's wish list: repeal of the alternative minimum tax, allowing net operating losses for the next three years to be deducted from taxes paid up to five years earlier, and stepping up the expense provisions for capital purchases. Some small-business leaders and economists maintain, however, that as a tool to boost short-term spending, the legislation is flawed.

"As a stimulus package, it stinks," says William Dunkelberg, chief economist for the National Federation of Independent Business (NFIB), which has some 600,000 members and officially supports the legislation. "It just moves money from one pocket to another. And [given that a recession is already well under way], it's too late." His remedy would be rapid-fire, retroactive tax cuts for everyone.

Such tax cuts make sense to Tom Gunn, executive director of the Arizona Small Business Assn. He would temporarily cut payroll taxes to give all workers an immediate break. Yet Gunn isn't critical of the House bill, which has come under fire for giving much more to corporations than individuals. He argues that, even if consumers spend the extra money, the effect will not be as great as that attributable to businesses spending, which creates jobs.

Critics counter that those tax breaks will go to both wealthy companies and those in dire need, and that some of the money will be pocketed rather than spent. And if consumers aren't spending, they ask, why would businesses expand?


  Cutting rates for specific actions going forward makes more sense than doing so on already-paid tax bills -- which is what the repeal of the alternative minimum tax does, says Irving Leveson, president of in Marlboro, N.J. The House passed "more of an assistance package" than a stimulus one, he says. A faster, more direct way to help the economy would be an investment tax credit for new hiring. "It's not that you shouldn't give money to companies, but you want to give it for new decisions," he believes. Leveson also thinks the simplest remedy would be across-the-board personal and corporate income tax cuts, including some capital-gains cuts.

Complete, retroactive elimination of the alternative minimum tax, which was meant to ensure that neither businesses nor individuals use loopholes beyond a certain level, is going to benefit the big corporations far more than small business, says Joel Marks, head of the American Small Business Alliance. "At this point, the economic stimulus should be coming from the bottom up, not the top down," says Marks, who defines the bottom as working people, small businesses, and low- and middle-income families. He recommends companies receive targeted tax credits for education and training, and to alleviate the growing cost of health insurance.

The House bill extends this year's tax rebate to those 30 million households with incomes too low to file tax returns, and it earmarks $12 billion for extended unemployment benefits and health-insurance subsidies for the newly jobless. But the bulk of the $100 billion goes for corporate tax cuts. And while the Senate version also provides a tax rebate for the working poor and more unemployment and health-insurance benefits, it focuses largely on spending rather than tax cuts.


  Government spending for construction and other capital improvements is "the worst fiscal stimulus you can have" because it takes the longest to put into place, says Dunkelberg. As economic stimulus, government spending would have a long-term result, agrees Von Bargen, but the psychological boost would be immediate. He would like Congress to commit significant funding for education "to improve our human capital," as well as to building and repairing infrastructure, and for research and development. "That not only puts in cash, but it changes the mindset," he says. "Given terrorism and the economic doldrums, it expresses confidence in the future."

Dunkelberg is one small-business economist with confidence in the future, no matter what the stimulus package looks like. What's $100 billion or so compared to the $10.2 trillion economy, he asks? "You can't have record growth every year," he says, "but this economy likes to grow. It'll grow in spite of what Congress does. Most of what's going on here is parading."

If he's right, many parade-watchers will still have reason to cheer.

By Theresa Forsman in New York

Edited by Robin J. Phillips

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