As presidential candidates share their vision for the future with voters across the country, they detail plans to bolster the economy and encourage small businesses owners, employees, and entrepreneurs.
This month, Vice President Kamala Harris proposed an expansion of tax incentives for small businesses—increasing the current $5,000 incentive to $50,000 for small business startup expenses, with the goal of creating 25 million new small business applications over four years.
In Donald Trump’s presidency, his 2017 Tax Cuts & Jobs Act lowered the corporate tax rate from 35% to 21% and reduced personal income taxes. Provisions of this legislation are set to expire in 2025. He has proposed lowering the corporate tax rate further and making the cuts permanent.
Q. While kickstarting small business growth is a worthy goal, are there unintended consequences to common federal interventions, like incentives or tax cuts?
A: Tax cuts and subsidies can certainly lead to unintended consequences for small businesses.
Subsidies often benefit certain businesses over others (e.g. chip manufacturing, steel, etc.), creating a market distortion. This can lead to an inefficient allocation of resources, benefiting less efficient businesses at the expense of more innovative or growth-oriented firms.
Tax reforms, even if well-intentioned and aimed at simplifying things for startups, can inadvertently create complexity and compliance issues for small businesses. For instance, the Tax Cuts and Jobs Act introduced provisions that, while beneficial in the short term, led to increased administrative burdens for many small businesses. There are still lingering effects from the Employer Retention Tax Credits, too, where startups continue to wait for critically important IRS disbursements.
Lastly, subsidies can lead to overdependence on government programs, stifling innovation and growth potentially. Some small businesses receiving subsidies might lack the incentive to grow or become more efficient. Some investors can be critical of Small Business Innovation Research (SBIR) recipients because the grants meant to commercialize scientific discoveries and innovations can become more like grant-funded academic labs than market-disciplined companies.
—John Surdyk is director of the Initiative for Studies in Transformational Entrepreneurship (INSITE), which advances entrepreneurship research, curriculum development, and programming at UW–Madison. He also leads the StartUp Learning Community and supports the Arts Business Competition, the Clinton Foundation Global Initiative, and the 100 Hour Challenge. Surdyk teaches introductory entrepreneurship, social entrepreneurship, and community consulting with arts and cultural organizations at the Wisconsin School of Business.