Tag: stimulus

FICA Tax Holiday Will Allow More Businesses To Succeed

Note: This is the second in a series of posts about policy changes that make starting a business easier.  The first post on heath care is here.

According to the US Department of Labor, there are a little over 1 million new businesses created in the US each year.   The popular misconception is that 90% fail within five years.  Although real data only show that at least 25% fail within the first year and at least 44% fail within the first three, that percentage is still very high.  Looking at real numbers, over 250,000 firms go out of business within one year.

Businesses fail for many reasons.  The market may change or a competitor could enter the market.  It could be a bad business idea.  The founder might decide to do something else or not have the time or make the necessary committment.  The business may have poor access to credit or funding.  Margins could be too small or the owner cannot make enough to live comfortably. 

Most startups are taxed by FICA (Social Security and Medicade) at a 15% rate on any net profit they earn.  FICA taxes cost small businesses and startups over 15% of net profits, as business owners have to pay both the employer and employee sides of the contribution.  Unlike the progressive income tax, FICA taxes start at $400 of income and end at a little over $100,000, making FICA a very regressive tax.

The 15% FICA contribution is a huge obstacle for new businesses.  For example, take a person who starts a dry cleaning business that makes $30,000 in net profits in year 1.  The founder has to make enough money to reinvest in the business and pay themselves a salary in order for them to stay in business.   The founder owes around $4,500 in FICA taxes.  Instead of taking home $30,000, less income taxes, the owner takes home $25,500.  For many people, $4,500 can be the difference between keeping the business open for year 2 or closing the business.  The same thing can happen to tech startups, too.  Many small businesses and startups need that little extra push to get them over the hump in the first three years.

I propose a FICA tax holiday for new businesses.  Here’s how it would work:

For the first two years, new businesses do not have to pay FICA taxes.  Instead, their FICA tax liability is “banked” and becomes due in year three, assuming the business is still around.  If the business fails, the founder would not have to pay FICA, but if the business succeeded, the founder would have to pay the FICA taxes from years 1 and 2.  Going forward, the business would pay their taxes normally.  

This plan is very similar to what many professionals like lawyers, accountants and others do with startups that they work with.  For example, its common (at least in Madison) for lawyers to agree to withhold bills for a year or two, or until the company is profitable or raises money.  It allows the startup to worry about business operations and not drown under expenses during the startup period.  If the business becomes profitable, the lawyers get their fees in full, plus more fees in the future.  

FICA taxes would work the same way.  Imagine if instead of 25% of businesses failing in year 1, only 24% failed.  Considering Americans start over 1 million new businesses per year, a 1% drop in the failure rate would lead to 10,000 new businesses making it into year 2.  These businesses would continue to generate profits and create jobs, thereby strengthening the economy.  If more business succeed, the FICA taxes that the government could collect in year three would be greater than the current solution.

I think a plan like this is politically feasible, as it helps both tech startups and small businesses alike, especially with the need to for stimulus during the current recession.  I think it could have broad support from both sides of the aisle nationally, but it may be too big for Congress to act nationally.  It would be interesting if a state would offer a plan like this that offered rebates on FICA taxes for businesses located in the state.  It would be another incentive to get business to stay or move to the state that would not cost much.  I am hopeful that government will think about incentives like this plan to help entrepreneurs of all types succeed.

The Stimulus and Health Care: A Bad Idea

Betsy McCaughey’s article on Bloomberg titled “Ruin Your Health With the Obama Stimulus Plan” shines a light on a portion of the stimulus plan that I had not heard of until today.  Her article is impeccably sourced and links directly to pages in the stimulus bill.  It starts out with a provision that I don’t think many people will argue with, as the benefits are obvious:

The bill’s health rules will affect “every individual in the United States” (445, 454, 479). Your medical treatments will be tracked electronically by a federal system. Having electronic medical records at your fingertips, easily transferred to a hospital, is beneficial. It will help avoid duplicate tests and errors. 

From there, the bill moves farther, into more controversial and I think potentially disastrous territory:

One new bureaucracy, the National Coordinator of Health Information Technology, will monitor treatments to make sure your doctor is doing what the federal government deems appropriate and cost effective. The goal is to reduce costs and “guide” your doctor’s decisions (442, 446). These provisions in the stimulus bill are virtually identical to what Daschle prescribed in his 2008 book, “Critical: What We Can Do About the Health-Care Crisis.” According to Daschle, doctors have to give up autonomy and “learn to operate less like solo practitioners.”

I don’t like the idea of some government bureaucrat possibly thousands of miles from my doctor’s office dictating what treatments I can and cannot receive. I do not want my doctor reviewing a script and a set of rules every time I come into the office. I would rather my doctor think critically about each decision and make a diagnosis and remedy on a case by case basis. The bill continues:

Keeping doctors informed of the newest medical findings is important, but enforcing uniformity goes too far. Hospitals and doctors that are not “meaningful users” of the new system will face penalties. “Meaningful user” isn’t defined in the bill. That will be left to the HHS secretary, who will be empowered to impose “more stringent measures of meaningful use over time” (511, 518, 540-541)

What penalties will deter your doctor from going beyond the electronically delivered protocols when your condition is atypical or you need an experimental treatment? The vagueness is intentional. In his book, Daschle proposed an appointed body with vast powers to make the “tough” decisions elected politicians won’t make.

So the plan is to “enforce uniformity” for doctors who are not “meaningful users” with “penalties” decided by the “HHS Secretary.”  This sounds like a plan for disaster.  It is even worse than the current HMO/Insurance company model because if this bill passes, people will not even have the option to pay for an experimental or risky procedure because the doctors will face “stiff penalties” for deviating from the bureaucratic regulations.  Daschle is seemingly in favor of an unelected body to make “tough” decisions on who should live and who should die.   In fact that is exactly what the bill would do:

[It creates] the Federal Coordinating Council for Comparative Effectiveness Research (190-192). The goal, Daschle’s book explained, is to slow the development and use of new medications and technologies because they are driving up costs. He praises Europeans for being more willing to accept “hopeless diagnoses” and “forgo experimental treatments,” and he chastises Americans for expecting too much from the health-care system. 

The goal is to “slow the development and use of new medications and technologies because they are driving up costs.”  While I agree that new treatments and technologies are driving up medical costs and that we should have a national debate on what to do about it, this method is asinine.  The article goes further:

The Federal Council is modeled after a U.K. board discussed in Daschle’s book. This board approves or rejects treatments using a formula that divides the cost of the treatment by the number of years the patient is likely to benefit. Treatments for younger patients are more often approved than treatments for diseases that affect the elderly, such as osteoporosis. 
In 2006, a U.K. health board decreed that elderly patients with macular degeneration had to wait until they went blind in one eye before they could get a costly new drug to save the other eye. It took almost three years of public protests before the board reversed its decision.

This solution for health care would be a disaster for America.  It would be like if when the car was first invented, the government stepped in and said “the car is getting too expensive, lets not innovate anymore, we are happy with where we are.”  If this had occurred, everyone would still be driving black model-Ts, without airbags, headlights, windshields, windshield wipers and all of the life saving innovations that have occurred since then.  It makes no sense to stifle innovation and experimental cures to appeal to the lowest common denominator.

We are supposed to accept that we are going to die earlier than necessary because our lives will not be cost effective?  We are supposed to trust a government appointee to run a formula that will let us know if we can get a treatment or not?  Further, if we are supposed to trust all of this, why is it being included in the stimulus bill?  If it passes, some entrepreneurial doctors will likely start clinics for experimental cures in other countries, leading to medical tourism like 70,000 British citizens do each year.  These doctors will leave America and begin to innovate other places, just like how some stem cell research left the United States after Bush forbid federal funding to some projects.

I think everyone agrees that something needs to be done to try to solve the rising costs of health care, but America needs a frank and open debate on health care.  Whether we end up with universal health care or some other plan, Americas need to know what is going on.  A bill of this magnitude should not be attached to a stimulus bill that is being pushed through Congress at top speed.  Hopefully this gets struck from the bill and it is brought up again at a later date.