Small Business Owners to Congress: Fix the Debt with Entitlement Reform

The National Small Business Association’s economic report finds, “The growing national debt is the number one thing small businesses thin[k] Congress and the administration should address.” Small businesses employ the majority of American workers and are vital to the innovation that grows the American economy.

After a severe recession, the fiscal cliff, and higher tax rates, small business owners have faced many challenges over the past few years. Despite all of these challenges, reducing the national debt ranked at the top of the list. High national debt poses a risk to all small businesses because it increases the likelihood of higher future taxes, higher interest rates, and a weaker economy.

Growing government debt creates added uncertainty for small business. The National Federation of Independent Business’s (NFIB) Small Business Optimism Index finds that few owners are expanding or hiring. According to NFIB chief economist Bill Dunkelberg, “the pall of uncertainty over economic policy continues to depress investment spending and growth.” When and how Washington will deal with the nation’s growing debt challenges adds to already existing policy uncertainty from higher taxes, Obamacare, and the Dodd–Frank financial regulation bill.

When asked which deficit-reduction proposals small businesses would support, entitlement reform topped the list. Nearly two-thirds of small business owners support reforming and reducing entitlement spending. The small business community recognizes that the debt problem is driven by entitlement spending. Social Security, Medicare, and Medicaid are growing rapidly due to retiring baby boomers. The Heritage Foundation’s Alison Fraser writes:

Costs will balloon as retiring baby boomers file into these programs. In just 13 years, when today’s kindergarteners enter college, these programs plus interest on the debt will devour all tax revenues. Entitlement reform is necessary, urgent, and inevitable.

Just weeks after the fiscal cliff raised taxes on many small business owners, the Obama Administration is talking about raising taxes even higher, presumably to address the growing debt. White House senior advisor David Plouffe said, “We’ve dealt with the tax rate issue, now it’s about loopholes.” If closing loopholes is not paired with lower marginal tax rates, closing loopholes is just another way to raise taxes.

Our debt problem isn’t the result of too little tax revenue. It is the result of too much spending. And tax hikes, whether through higher rates or loophole closing, cannot raise enough revenue to put a dent in deficits and debt. Tax hikes are a way for Washington to avoid the hard work of cutting spending while pretending to do something about our impending debt crisis.

A growing national debt threatens to raise interest rates for small businesses and restrict access to capital. Today, due in part to the Federal Reserve’s expansionary monetary policy, America enjoys historically low interest rates, with the 10-year Treasury notes paying less than 2 percent interest. As the national debt increases, borrowing costs for the government may rise, too. Greece, whose national debt has exploded, is currently paying over 10 percent interest on their 10-year bonds after that interest rate hit a 48.6 percent high in March 2012.

Higher interest rates for government bonds also bring about higher interest rates for small business borrowing to run and expand their businesses. Dodd–Frank, with its countless new rules and regulations, is already making it more difficult for individuals and businesses to borrow money. A growing national debt threatens to raise borrowing costs, which would further restrict small businesses’ access to capital. Heritage expert Romina Boccia warns:

Higher interest rates have a real and pronounced impact on the lives of ordinary citizens and translate into less investment and thus slow growth in the rest of the economy. For many Americans, the dream of starting a business would no longer be in reach.

Additionally, budget deficits pose the risk of crowding out private investment, which reduces savings that can be invested in small businesses. This also slows economic growth. Lastly, a weaker economy also means that consumers will be less able to purchase the goods and services that small businesses provide.

Congress should devise a budget that balances in 10 years without raising taxes further and without sacrificing our national security. If instead Washington follows Greece’s example and fails to address our growing debt, severe austerity measures, which would harm all Americans—including small business owners—become more likely.

M. Christian McNally is currently a member of the Young Leaders Program at The Heritage Foundation. For more information on interning at Heritage, please visit: http://www.heritage.org/about/departments/ylp.cfm.