Will a One-Party Government Bring Prosperity to Small Business?

Michael Evans
Wed, 07 Dec 2016 13:38:24 +0000

On January 20, 2017, the Republican Party will take control of both the House of Representatives and the Senate and the presidency for the first time since 2006. The stock market, which some predicted to tank after a Trump victory, was down 800 points in premarket trading on election night, only to recover and reach all time highs in the two weeks following the Trump victory. One school of thought was that the Republican victory was already factored into the stock market, but this is likely not the case as nearly all polls predicted a Clinton victory.

Despite the Republican control of the legislative and executive branches of government and likely the judicial with looming Supreme Court appointments, the odds are against a booming economy during the Trump administration. Every Republican president since Teddy Roosevelt experienced a first-term recession and four Republican presidents experienced two recessions while in office. Meanwhile, Democratic presidents have, coincidently or not, avoided recessions in either their first or second terms.

Other economic indicators, such as GDP, stock market returns, real wages, and the unemployment rate, have also tended to be more robust with a Democratic president. Unemployment fell by 0.8 percentage points with a Democratic president on average, while it rose 1.1% with a Republican.

The other school of thought for these “trends” is that, despite the significant differences between the parties on virtually every “hot button” issue in the campaign just concluded, when it came to the economic recovery and jobs growth, the policies of the mainstreams of both parties were significantly aligned. It could be that recessions during Republican administrations have been due to bad luck and/or deep underlying cycles of the economy—not differences in economic policies.

Case in point:

Interest Rates. Savers may not like getting rock bottom returns on their fixed income investments, but low interest rates are good for business. Borrowing at a low cost stimulates consumer spending, corporate working capital and capital expenditures, and economic production. Credit availability is significant today and banks are bemoaning that they can’t lend money to businesses fast enough. Generally a Republican issue, low interest rates have been driven by the Federal Reserve with the tacit approval of a Democratic administration.

Tax Incentives. The old mantra “The Democrats want to raise taxes for business and the Republicans want to lower taxes” is no longer true. One of the largest incentives, the first-year deduction for capital purchases (IRC Section 179), has been expanded under a Democratic administration. Recently, Senate Majority Leader Democrat Harry Reid supported extending the higher Section 179 deduction, along with extending 54 other deductions that expired in 2014.

Red Tape and Regulations. Business, particularly small business, complain about the mounting government regulations, red tape, and barriers to doing business. Few can dispute that mounting regulations, while intended to protect the environment and consumers, have made it more challenging to grow a business. But effective January 3, 2013, The Small Business Act was created, in part, to help small businesses compete in the economic market.

So despite the gridlock in Congress, policies supported by both parties were implemented to support the growth of business. But what’s ahead and how can you position your company for Republican control of both the Congress and executive branch?

With control of the Senate, the House of Representatives, and the presidency, the Republicans can hold hearings and encourage bipartisan dialogue about key issues facing the U.S. economy and world issues. Armed with veto power, President Trump is likely to approve many if not all economic legislation designed to boost the private sector, much of which is likely intended to undo Obama administration initiatives.

Key Trump and Republican Small Business Legislation

First on the Trump agenda will be legislation ensuring the continued recovery of the U.S. economy and increased job growth. Total nonfarm payroll employment rose by 178,000 in November, and the unemployment rate dropped to 4.6 percent. Despite the addition of 161,000 new jobs last month and the reduction of unemployment from 10 percent in 2009 to 4.9 percent today, the Republicans will promote legislation to attempt to drive unemployment even lower. The first step is likely to be large expenditures designed to create jobs fixing America’s decaying infrastructure, financed by borrowing or by tax credits for companies that contract to do the work, or a combination of both.

Obamacare

Unlike Clinton, who wanted to expand the Affordable Care Act, Trump has promised to “repeal and replace job-killing Obamacare” with a new system. Under the new plan, he plans to make health insurance costs tax deductible. Trump’s plan would also allow people to buy healthcare across state lines, which he says will increase competition and drive prices down.

Of course, there are the 20 million people who might lose healthcare if Obama care is repealed. Although repeal of Obamacare will likely be hailed by the business community, many small businesses (less than 50 employees) are not required to provide healthcare and thus not directly affected by Obamacare.

Minimum Wage

Trump’s position on raising the federal minimum wage has varied over the campaign (“wages are too high”) to a point where Trump appears to be supporting some form of minimum wage increase. Currently many states and cities are enacting minimum wage increases, thus federal minimum wage increases may be less relevant going forward.

This position differs from many conservatives who do not support raising the federal minimum wage and instead believe states or employers should set their own standards. How this issue plays out remains to be seen. Look for pushback by business lobbyists against minimum wage increases that can be said to threaten jobs.

Taxes

Trump has been crusading against the current tax code as detrimental to individuals and small business owners, and he has vowed to make changes as president. Trump’s proposed tax plan would consolidate the system from the seven current tax brackets to three, with a top marginal tax rate of 25 percent. His plan would also decrease capital gains taxes to a maximum rate of 20%. But getting tax reform through the Congress is never easy because any changes threaten to hurt some constituencies. Whatever tax reform comes out of Congress is sure to be different than what was originally proposed.

Trade

Trump believes that America will continue to experience a loss of jobs going to markets overseas if our trade agreements stay in place or are not negotiated. A counter-argument is that job growth in the United States has recovered to a much greater extent than in other countries, partially due to trade agreements being in place. Protectionist policies ultimately have the effect of increasing the costs of goods and reducing spendable income, and have in the past accelerated economic recessions. Consumers who are used to paying low prices at Walmart will be alert to any policies that threaten a trade war with China and other trading partners.

Needless to say, we are likely to experience increased volatility in our economy and perhaps a growing chance of a recession despite a one-party government. Recessions are largely inevitable but can be managed when careful and well-thought-out economic policies are in place. Partisans on both sides would do well to remember that the performance of the economy depends on a complex set of drivers. Innovation that increases productivity has more to do with economic growth than the pronouncements of headline-seeking politicians. A continuing wave of industry-disrupting entrepreneurship, driven by seasoned executives as much as by youthful visionaries, may ultimately be more important to the economy than the change of administrations.