By Krista Morgan
Our economy is complex. Big trends are born out of hundreds of millions of individuals making hundreds of millions individual decisions. Trying to predict what will happen is hard. We can only use historical data and trends, and try to project them forward. But our world is changing, faster than ever before, and so where we’ve been is not always indicative of where we’re going.
Is the republican tax plan good for small business? Like with most things in life, it depends. As a business owner, here are the questions I ask myself to develop an opinion:
- Will our economy keep growing?
- Will consumers keep spending?
- Will my business benefit?
- Will I benefit personally?
Will our economy keep growing?
Economic growth is always good for business owners. In the years since the last financial crisis, GDP has grown an average 2.1% per year. Recent data suggests growth is increasing at a rate of 3.1%. It hasn’t been this high since 2007, and there has been a lot of talk this year of an impending correction in the market. People are worried this growth can’t continue indefinitely (which is true).
There is general consensus that Trump’s tax cut will provide a short-term boost to the economy. The corporate tax alone is expected to lead to 0.3% increase in GDP. It will benefit small business owners who are ready to seize this immediate opportunity. The question is how long it will last, which we really don’t know. Increasing our long-term debt by trillions of dollars is extremely worrying and will almost certainly have a negative impact on our future economic health.
Will consumers keep spending?
The past five years have seen all kinds of new businesses develop because consumers are spending. We’re buying craft beer, natural and organic products, high-end electronics, and we’re going out to eat, traveling, and having fun. Our portfolio at P2Bi is filled with emerging brands who are growing quickly due to high demand for niche products.
Overall, high consumer confidence is good for business owners. Economic theory says there is a correlation between increased discretionary income, and increased spending and economic growth. The tax plan is likely to increase consumer confidence for a period. That said, the tax cut is heavily geared towards high earners, and there is little evidence to suggest cutting taxes for the wealthy is going to increase spending. Typically, the wealthiest among us save or invest rather than spend.
Will my business benefit?
In a growth environment, business owners have the opportunity to expand market share. Expansion is dependent on capital. Business loans are an important source of funding for investment. Even though banks are still not lending at pre-recession levels, a host of online lenders have come in to fill this capital gap.
There has also been an increase in private capital investment for new businesses. In the short term, the evidence suggests there will continue to be capital available for business owners to take advantage of expansion opportunities. There is already evidence of industries gearing up for growth based on the proposed tax plan.
Will I benefit personally?
The highlight of the tax plan is a significantly lower tax rate on pass-through income (from 39% to 25%), which is marketed as a small business owner benefit. Sadly, this truly is just marketing. There is overwhelming evidence to suggest that it won’t directly benefit most small business owners because they are already paying the lower tax rate.
There is good reason to believe that the tax plan will benefit the economy as a whole, especially in the short term. Everyone who starts a small business dreams of huge success. A growing economy increases the likelihood of that success and gives us hope the American Dream is within reach.
If business owners are ready to seize the opportunity that comes with economic growth then I think there is huge potential for them to prosper, even though they won’t necessarily see immediate benefit from lower tax rates.
The key is to remember that economies are cyclical and growth doesn’t last forever. As business owners, we have to invest wisely, stay lean, and be ready to react quickly when we see growth slowing.
Krista Morgan is the CEO of P2Binvestor. With the heart of an entrepreneur and the brain of a calculator Krista Morgan started P2Binvestor over 5 years ago with a mission to help growing businesses succeed. In addition to running P2Binvestor, she is the cohost of Women Who Startup Radio (a podcast), an ardent mentor to other women entrepreneurs, and a trusted leader who speaks regularly on business finance, fundraising, and scaling a startup.