Create Two Million New Businesses

August 10, 2020
Dane Stangler

Millions of America’s smallest businesses have been severely affected by the COVID-19 crisis. They’ve seen revenue evaporate and have been forced to lay off millions of workers. Over two million small businesses had simply disappeared by June 2020. The U.S. economy now finds itself in a deep hole, with millions of small businesses gone for good—and a dried-up pipeline of new business creation.

By the end of June, the American economy also was without tens of thousands of new “employer” businesses (those with employees) that normally would have been started. The pandemic and economic crisis have wreaked havoc on existing small businesses and the new start-ups that the economy depends on for job creation and innovation.

Meanwhile, the Trump administration’s implementation of the Paycheck Protection Program (PPP), authorized by Congress to provide billions in loan guarantees through the Small Business Administration (SBA), has been flawed. The Treasury department has provided insufficient, and constantly changing, guidance to lenders and businesses. The SBA’s own Inspector General found that the administration did not adhere to Congressional intent in deploying PPP funds.

Even before COVID-19, the Trump administration had proven itself incapable of inspiring entrepreneurial confidence. Business formation had trended steadily downward over the previous two years. According to a PPI analysis of Census Bureau data earlier this year, new business applications fell steadily from the middle of 2018, after rising more or less interrupted since 2012. Business applications that have a “high propensity” of turning into employer businesses had also fallen since the middle of 2018.

The picture gets worse the deeper you dig. The pandemic recession has disproportionately affected female, Black, and Latinx business owners. By April, the number of female-owned businesses had fallen by 25 percent (compared to 20 percent for male-owned businesses). The number of Black- and Latinx-owned businesses had shrunk by, respectively, 41 and 32 percent (compared to 17 percent for white-owned businesses).

These are astonishingly high losses and they come on top of a small business landscape already tilted against minorities and women. According to Census data, going into the crisis, Blacks owned just two percent of employer businesses in this country, despite comprising 13 percent of the population. Latinos and Latinas, making up 18 percent of the population, owned six percent of businesses. Male-owned businesses were larger and with higher revenues than female-owned businesses.

What’s needed now is a major national push to reinvigorate business creation and address underlying demographic disparities in business ownership. For women and minorities, when it comes to entrepreneurship, returning to the pre-crisis status quo is simply not an option. It shouldn’t be an option for the country, either. Greater business creation and ownership among women, Blacks, Latinx, and others will accelerate recovery and strengthen resilience.

Over the last 40 years, new businesses have, on average, created about six jobs per year, per company. If one million new Black and Latinx businesses opened (replacing the ones that have closed permanently) and were joined by half a million additional new businesses, we could see about nine million new jobs created. Not all these companies would survive—in the “normal” course of economic activity—but a significant subset of them would not only survive but also thrive. Young companies that survive and grow drive the lion’s share of net new job creation each year.

Public policy should seek to help stimulate new business creation and support the survival and growth of young businesses. The focus of this effort should be on women- and minority-owned businesses. Vice-President Joe Biden has proposed renewing the State Small Business Credit Initiative (SSBCI), an Obama-era program, to focus on these businesses. Evaluations of the SSBCI found positive effects in terms of investment and job creation, but a much larger effort is likely needed. The federal government has many tools at its disposal to be leveraged in support of new business formation and to aid specific types of entrepreneurs.

PPI believes the federal government should launch a National Start-Up Initiative that aims to spur creation of at least two million new businesses as our country recovers from the pandemic recession. It would include the following key actions:

Create a startup visa for founders of new companies. These would include foreign students graduating from a U.S. university, those transitioning out of Optional Practical Training, or any H1B visa-holder after three years. The foreign-born start companies at disproportionately high rates; encouraging them to do so would give a significant boost to overall business creation. This could be accompanied by incentives for business creation in specific geographic areas or neighborhoods.
Leverage federal research funding to reform technology commercialization processes at universities. America’s research universities are the best in the world at knowledge creation, yet their ability to turn knowledge into innovation and new companies has been declining. Many promising entrepreneurial ventures get stuck in bureaucratic processes. The federal government, which provides billions of dollars to support university research, should create new incentives for those institutions that devise more effective commercialization practices and generate new businesses for their communities.
Create a new “Start-Up Tax Credit” to encourage new businesses to grow into large businesses. Modeled on the Earned Income Tax Credit, the Startup Credit is designed to help these businesses avoid the scale-up trap unintentionally posed by tax breaks and regulatory exemptions for new enterprises. For example, businesses with fewer than 50 employees are exempt from the employer shared responsibility payment of the Affordable Care Act and providing unpaid leave. While these “carveouts” certainly help small businesses get off the ground, they impose an implicit tax when those companies grow past a certain threshold. The Startup Tax Credit would mitigate that tax.

As proposed by PPI economist Elliott Long, the Startup Tax Credit would be tied to the number of employees and payroll at a small business. Firms that have been operating for fewer than five years would be eligible for a credit equal to half the employer-side payroll tax they pay on their first 100 employees, up to a maximum credit of $1,200 per employee in 2020 (indexed to inflation). The proportion of payroll taxes offset by the credit and the maximum credit per employee would then gradually phase down as businesses grow until phasing out entirely once the business reaches 500 employees. PPI estimates this proposal would cost roughly $150 billion over 10 years.

PPI has also supported the New Business Preservation Act, introduced by Sen. Amy Klobuchar (D-MN). This would allocate $2 billion in federal funding to match private investments in areas of the country bereft of startup equity investments.

These steps would help seed the ground for new business creation, just as our country needs to create millions of them to provide jobs to U.S. workers whose previous jobs vanished in the pandemic shutdown. They would also create conditions that would make America’s entrepreneurial culture more vibrant and resilient against future public emergencies of all kinds.