EpisodE 91: the War on small business with carol roth

Description:

Tom continues his series on the war on small businesses. Carol Roth joins Tom to discuss her research into government policies that date back 40 years and consistently undermine small business. Tom & Carol also offer strategies that small business owners can use to fight back against these punitive policies. 

 

Looking for more on Carol Roth?

Website: https://www.carolroth.com/

Book: The War on Small Business

Facebook: https://www.facebook.com/caroljsroth

Twitter: https://twitter.com/caroljsroth

YouTube: https://www.youtube.com/user/CaroljsRoth

LinkedIn: https://www.linkedin.com/in/caroljsroth/

SHOW NOTES:

02:49 – How Does The Enormity Of Biden’s Proposals Raise Concern?

05:51 – How Is Biden Proposing The Biggest Change In Tax Policy In Over 100 Years?

07:53 – How Will The Middle Class Pay More Taxes Under Biden’s Proposals?

13:39 – What Strategies Will Biden Use To Pass His Proposals?

18:08 – Why Would Biden’s Changes To Capital Gains & Estate Taxes Be Disastrous?

21:58 – Is Biden Trying To Destroy Small Businesses?

24:31 – How Can Investors & Entrepreneurs Prepare For Biden’s Changes?

Transcript
Announcer:
This is The WealthAbility® Show with Tom Wheelwright. Way more money, way less taxes.

 

Tom Wheelwright:

Welcome to The WealthAbility Show, where were always discovering how to make way more money and pay way less taxes. Hi, this is Tom Wheelwright, your host, founder, and CEO of WealthAbility. So, the war on small business, it is clear from the pandemic that there has been a war against small business. It is clear from the Biden tax proposals that there is a continuing war on small business, but we have literally the expert on the war in small business, Carol Roth, who literally wrote the book, The War on Small Business. Carol, it is so great to have you here. We were just discussing… I'm actually in the middle of a five-part series on Entrepreneur Magazine talking about exactly this issue, so I'm so glad to have you. If you would just introduce yourself a little bit, tell us a little bit of your background.

 

 

Carol Roth:

Yes. So I am a “recovering” investment banker, TV personality entrepreneur, and as you mentioned, author of this new book, The War on Small Business, which is my second on small business. I am an advocate for small business, small government, and as you can tell, big hair, so that's in my wheelhouse. I'm excited to have this conversation with you.

Tom Wheelwright:

No, that's awesome. It's very clear that the pandemic was all about big business, big business won, small business lost, but in your discussions, in your articles and your book, you talk about this started a long time ago. So can you take us back and where did this one small business by the government and by big companies, not… Big companies always had a war on small business, we know that, except when they were small, right? But we know about that, but the government's involvement, can you just take us back to that? As everybody knows, I'm not a conspiracy theorist, but I do… You can't ignore what's going on.

Carol Roth:

Yeah. I mean, so to put it in non-conspiratorial terms, I look at a spectrum of economic freedom. On one side, you have traditional free-market capitalism, which is freedom, choice, transparency, and it's protected by the guardrails of the protection of individual rights, including property rights. You don't have the protection of property rights, you don't have a government there to protect those, it's very difficult to have capitalism. On the other side of the spectrum, you have what I call central planning. I use central planning to talk about a handful of people making decisions on behalf of a whole bunch of people and usually using forced coercion and control to do so. I use that phrase instead of socialism or communism or pretty socialism or whatever it is, because they don't want to get caught up in the definitions. I want to say very conceptual.

And so, if you look back, particularly over, I don't know, the last maybe 40 years, there has been a concerted effort to grow the force and control and the planning piece of what we have going on in the economy and we have less of it in terms of the freedom and choice. So if you look at where the economy sat going into 2019, it was split down the middle, 30.2 million decentralize free-market-esque small businesses who represented about half of the GDP and about half of the employment, but 99.9% of all business entities. And then you have half the economy concentrated in about 10 to 15,000 big businesses, who also had about half the economy and half the employment. So you can already see, “Okay. Well, we've got all these people over here and they're decentralized, but if we want the power, we need to be focused on these guys that are easier to control, that had the money, the lobbying dollars.”

So if you look back on the interactions and intervention in the public markets by the federal reserve, if you look at the governments and the way they brought in China as a trading partner to something that was supposed to be capitalism, but had communists who didn't value intellectual property rights, they don't value any rights, human rights. As our partner, if you look at the growth in government spending before COVID, at all three levels of government, it was upwards of $8.1 trillion. I mean, that number is just staggering. If you look at the number of laws that have been passed and look at all of these things, that central power side has gotten bigger and with so has come the war on that part that's decentralized, whether it's through regulation, whether it's through licensing, insurance, different tax treatment, which is obviously right in your wheelhouse, Tom.

All of these things have started to tilt the playing field because it's so much easier for the government to deal with these big businesses and they get more benefits, and that's how they continue to consolidate that power. So that was really the pathway that led into the decision-making that happened over the last 12 to 15 months, where the government pitched winners and losers, and they did so not based on data or science, but based on political connections. We saw the most historic wealth transfer on the backend of this from main streets, small businesses, average Americans to Wall Street and the people who are connected.

Tom Wheelwright:

Well, I think that it's pretty clear during the pandemic, when you have Target, Walmart, and Costco open, and you have the small boutique stores closed, just because they happen to sell food, right? Not because there was any difference in health benefits to wearing a mask in a Target versus wearing a mask in a boutique, right? I mean, if the mask work, they work. It doesn't matter where you are.

Carol Roth:

I'll give you a worst one. What about a weed dispensary that wasn't even legal a couple of years ago, it was now all of a sudden essential-

Tom Wheelwright:

Essential.

Carol Roth:

… but all of your other services weren't. I mean, we could go down the list between dog grooming and people grooming, all of these things that weren't based on data and science. So from the beginning, we were not all in this together as they like to say.

Tom Wheelwright:

No, that's absolutely for sure. You see how many small businesses have gone out of business during the pandemic and you see how companies like Amazon, Walmart, et cetera, have just thrived during the pandemic, including places like McDonald's, et cetera, et cetera. Small restaurants got killed, but McDonald's, all my heavens, they did great. You mentioned in your writing that you even believed that the PPP loans was an attack on small business. Can you explain what you mean by that?

Carol Roth:

Yeah. I mean, it goes back to the concept that we were not all locked down. We just discussed it, right? There were all of these places, the Amazon warehouse, Costco, as you mentioned, that were not locked down. So we didn't have lockdowns. We had these targeted lockdowns that primarily affected small businesses. Instead of giving them due compensation, which is required under the Constitution, if the government takes your property for the public good and shutting it down for a health concern, is taking it for the public good, they owe you appropriate compensation. But if you looked at how much money was given out both in the first tranche of PPP under the CARES Act and just in total, I mean, it was crumbs compared to the actual reality of the situation, and it was structured in such a way that it actually didn't get to the vulnerable businesses, especially during that first tranche.

The supply, which was a couple hundred billion out of the multiple trillions that were spent and over the multiple trenches, still less than a trillion dollars out of the six-plus trillion dollars that were spent, it was structured, so you could take down millions and millions of dollars under PPP. Well, if you could take down that kind of money, you have other access to capital. In other ways, you don't need a PPP loan. But if you are a hairdresser or a dry cleaner, or a gym or whatnot, you probably do. They didn't even get in line because the banks obviously service those customers who were their best customers, which were these big companies.

So Kanye West got his PPP loan, but you're struggling local business didn't. And then all of the cash that was given out, whether it was to the Kennedy Center or to colleges who have already get a tax exempt status, already benefit from the government nationalizing the student lending business, and oh, by the way, had been paid in full for the semester by their students and we're not in any situation that required any additional capital. In fact, they had less expenses because now nobody was on their campus. They were getting money-

Tom Wheelwright:

By the way, they were still charging full tuition, even though they had no expenses.

Carol Roth:

Exactly. So they were getting this helicopter money. You didn't have to do anything. But if you're a small business, you had to jump through hoops. You had to hope you had good credits or else you were going to get denied, as I heard happened to many small business owners. You had to trust that the government was going to forgive it. Many of them didn't qualify either in the first tranche, in some cases in multiple tranches. So if you were really trying to save the people that you targeted, if you were really trying to enact this eminent domain support, boy, was that nowhere in the realm of what that should have been.

Tom Wheelwright:

Yeah. Well, on top of that, of course, you had to use it for the employees. So the employees had to get the money. The business couldn't actually get the money. You have to use it for employees in order for the business to get the money at all, which was, I thought, very interesting. And then the impact in your mind on the unemployment subsidies and how that has affected small business.

Carol Roth:

Yeah. I mean, obviously, there were the initial issues, which were the government shutting down small business by mandate, obviously, the biggest, not compensating them appropriately, but that was the long tail effects, which include the stimulus checks and then the extended unemployment benefits. I think it's really important to clarify, we're not talking about regular unemployment that your employer pays in on your behalf or in some states that you pay and sue, because that's your money. You should have access to that. This was an enhanced amount in incremental. In the beginning, it was $600 a week. They reduced it to $300 a week, but it was an extra bonus to not go back out and look for a job, which if unemployment is supposed to sustain you when you don't have a job, why are you bonusing people for that?

So it's conditioning people to think, “Well, you don't have to worry. The government is going to take care of you.” What it has done on the back end is it's trying to push a defacto minimum wage increase because people, whether they can get paid more staying at home, or even if it's not quite as much, the differential doesn't make up the, “Well, if I could just sit around and play video games and I get paid a couple hundred dollars less a week, who cares?”

Tom Wheelwright:

Especially when they make it non-taxable, right? So they made that $10,200 non-taxable. All of a sudden, you can either go to get a job, back to your restaurant job, for example, and get a job and pay tax, or you can sit at home and collect unemployment and pay no tax. So, that non-taxable aspect of it, I think, actually was a pretty big deal for a lot of people.

Carol Roth:

And that's your wheelhouse. You're the expert at that, so I'm going to defer to you on that piece of it. But the long tail effects, we can see that in the numbers is that we have 9.2 million jobs that are unfilled in this country. This is more than we had before the pandemic started in February 2020. We can't get people back to work. And then that and other impacts of just turning off a large swath of the economy and thinking you could turn it back on, like your power cycling a computer modem, has disrupted supply chains.

And then if you think about the long-term effects from a small business owner's perspective, so you're a restaurant. You were shut down and [inaudible 00:12:46] apart. You barely hung on. Maybe you got some PPP crumbs. You finally can open up again. You can't find workers. So now, you, as the owner, is probably busing tables, being the hostess, taking reservations, cooking the food, doing the stuff. Your customers who are dying to come back in, come in, they have bad service because you don't have enough people to work there and they're never going to come back and see you again. I mean, it's just like [crosstalk 00:13:13]-

Tom Wheelwright:

Well, so let me give you an interesting experience that my wife and I have noticed. So, we've been out to restaurants over the last few weeks. What we've noticed is an amazing shortage of bartenders. It's been really fascinating. First time ever consistently food comes before drinks. So what that's saying is that, guess what, we don't have enough help and that's why we've got these service issues. Or you go and you stay at a hotel and guess what, they're not cleaning except once a week. Let's say you're there for a week, they're not even going to come and clean during the week. Why? Because they can't get the people there. So, we know that's an issue going on right now. So, why? Why do you think it is that the government is doing this? Because when we look at what's… I mean, it was really clear in the pandemic and it's very clear, we'll get to this, it's very clear in the Biden tax proposals that this is a very big swing from focusing and giving benefits to small business to benefiting the big guys. Why do you think that's going on?

Carol Roth:

So, I think if you think about the stimulus checks, the unemployments, again, it's conditioning people to devalue the dignity of work and to think that the government is going to take care of you. If you're the government, who already has an incredible amount of power, what's the next step into getting more power? It's more things under your purview. UBI is a clear one of that. So if you don't know UBI, it's universal basic income. It's putting the government who doesn't make anything of value decide that it's going to promise you somebody else's money for the future, including your own. So it's like a shell game. You give the government a dollar and they'll give you back 80 cents guaranteed, or something like that, or really bad trade for everyone.

But I think that this is just a step in terms of trying to consolidate that power and to get more people on the government [inaudible 00:15:11] and to move more of that decentralized part of the economy towards the central part that they're already buddies with because… I don't care about the intention. I don't care if you think that small businesses are too small to matter. I don't care if you think that they're too hard to control, but they stand in the way of that political power grab. And so, the intentions don't matter if the outcomes that matter. When you have this big behemoth that is continuing to increase its purview, that's the outcome that's going to happen.

Tom Wheelwright:

Hey, if you like financial education the way I do, you're going to love Buck Joffrey's podcast. Buck's a friend of mine. He's a client of mine. He's a former board certified surgeon and he's turned into a real estate professional. He has this podcast that is geared towards high-paid professionals. That's who he's geared towards. So if you're a high-paid professional, you're going, “Look, I'd like to do something different with my money than what I'm doing. I'd like to get financial educated. I'd like to take control of my money and my life and my taxes,” I would love to recommend Buck Joffrey's podcast, which is called Wealth Formula Podcast with Buck Joffrey. I hope you joined Buck on this adventure of a lifetime.

So let me throw out another theory that I've been exploring and I explore in my entrepreneur magazine articles on the same subject, and that is that Joe Biden has said from day one when he first started running, he is a union guy. How much of this do you think is coming from there, from the Biden administration, given that small businesses don't get unionized, only big businesses get unionized? Do you think that there's a correlation there?

Carol Roth:

I try to be fair and non-partisan about this. I think it's a systemic issue and I think that it predates the Biden administration, but there's no doubt that the Biden administration's policy are big special interests and big business-oriented, and that is the unholy triumvirate, right? It's central planners and government. It's big business and it's big special interest. If you look at all of the policies that are coming out of that administration, it does. It benefits the big businesses. It benefits the unions because obviously, like you said, it's much easier to unionize on a big business side than it does on a small business side. It's stifles innovation. So if you look at the PRO Act, if you look at even the capital gains increases, any of these things, the minimum wage increases, any of these policies really do have the direct impact of being anti-competitive and putting up more barriers for small businesses to start and to continue to operate and to continue to compete and to consolidate more and more power with big businesses, big special interest in government.

Tom Wheelwright:

Well, let's talk about that capital gains tax just for a second, because I think it's a huge deal. The current Biden tax proposals are so big that if they were enacted, they would be the biggest change in tax policy since 1913 in the United States. Here's where they really attack small business. So first of all, let's just start with this simple exchanges, which Joe Biden calls a loophole, which by definition, if it's a tax code section, it's not a loophole. Okay. It's intentional. It takes all the liquidity out of the small real estate market. Okay. So, who's going to be able to buy real estate? Well, that's going to be the big businesses, the big companies, Blackstone, for example, those guys, right? They're the big companies.

Now, let's look at the capital gains tax on transfers to your family on death, things like that. We actually calculated, if you're in California and you built a business from scratch and it was worth $100 million, under the current proposals, out of that $100 million, your children would inherit roughly $8 million. The government would take $92 million. So, what this really means is, is that this is a confiscation of assets. So if you owe $92 million, how are you going to get that to the government? Well, there's only one way, and that is-

Carol Roth:

Yeah, to sell your business. Yeah.

Tom Wheelwright:

… to sell the business. Who's going to have the money to buy the business? Well, the big business.

Carol Roth:

Right.

Tom Wheelwright:

We already know that the big tech, they're very predatory in their practices. Walmart, very predatory in its practices. “You either sell to us or we will put you out of business.” That is very clearly their mantra basically with a small business. So now we've got the Biden administration, which very clearly under the tax proposals is very anti-small business and really has no impact on big business. So, here's another one for you. You'll appreciate it, Carol. So, the light exchanges for small real estate transactions, they're a loophole, but the ability for a big company to acquire a small company for stock and have absolutely no tax consequence, that's not a loophole. Oh, no, no, that is good. That's good for us. Okay. So, the big business actually wins and the small business loses.

Carol Roth:

Yeah. We see this over and over again, because everything sounds like it's coming down on the big guy, but they never are the ones that get hurt by this. They always have these different sort of ins and outs, and it's always a small business. I'll offer sort of a bigger macro consequences and just something like the traditional capital gains rate, if that's increased. Obviously, you've seen the federal reserve disrupt risk in the market in terms of decreasing interest rates and there are all sorts of implications, like we're talking here, that ended up benefiting the big business. But if you start disrupting the risk on the capital gains side, then it means that you have to take on more risk in order to earn the same returns. If you're somebody who has a lot of wealth, you're either going to hold on to that or you're going to risk adjust for that.

So in that scenario, whether there's less capital or less of an appetite for risk, who ends up being the riskiest bets? It's the startups and the small businesses. So that means in terms of access to capital, the small businesses are going to have less access to capital. By the way, we saw this happen coming out of the Great Recession with Dodd-Frank when it was supposed to rein in the big banks, but it killed the number of smaller banks and killed small business lending. It let the big banks and big business lending have free rein. So again, these things sound great and we're going to stick it to the big guy and this is going to be good for the little guy, it literally never ever… There's no example where it ever is.

Tom Wheelwright:

Now, I mean, let's take the simple example. Jeff Bezos has been talking about, “Yeah, we can increase the corporate tax rate, et cetera.” At the same time, he's lobbying for research and development tax credits, right? So, what we know is that it's not the tax rate that matters, it's the tax you pay that matters. If you can get the tax incentives, who cares what the tax rate is? I mean, frankly, if your taxable income is zero, your tax rate doesn't matter. But let's look at that capital gains for an instance. So let me give you a scenario, Carol. Let's take your typical employee and they put their money away into a Roth for years and years, and years, and years.

Carol Roth:

By the way, of no relation, but I'm happy to take credit.

Tom Wheelwright:

When they retire, let's make it a regular IRA, not a Roth IRA, but thanks you for that. I liked that. I like Roth IRA. They don't particularly care for either IRAs, but let's say it's your 401(k), it's IRA, whatever, and you have $2 million when you retire. Okay. You get to spread that money out and that tax liability out over your entire lifetime plus 10 years of your beneficiaries after you die, right? So now, let's compare that to a small business owner. Small business owner, when they die, they sell their business. Okay. So, what they're saying is, is “Look, if you're a small business owner, the day you retire, we're going to tax your IRA, 401(k) at 40%, whether or not you take the money, whether or not you use the money.” That's exactly what this proposed capital gains tax does to the small business owner.

It is very much a war on small business. Absolutely. I just think there's no question about it. What can we do about this? I mean, what can the small business owner do? What can people do outside of writing their senators, which I hope they… If like me in Arizona, where we have Democrats in the Senate, we can write our senators. But outside of that side of it, which has maybe some small impact, what can we actually do?

Carol Roth:

Well, I mean, that's the $30 trillion [inaudible 00:24:19] question, isn't it? I think from a consumer standpoint, the easiest thing that you can do to help counteract this is to vote with your dollars. I saw a statistic the other day that Amazon is planning to capture 85% of the digital back-to-school shopping. Well, if you're shopping for back to school, maybe shop somewhere else. Again, I'm a capitalist. So if you find value in Amazon and it's just unbeatable, go ahead if you have nothing against them as a company, but you have to remember that your dollars and you're voting with your dollars as part of capitalism. And so, if you want this decentralization and this balance of power and you want to support the wealth creation opportunities for a small business owner, perhaps consider supporting a small business. I think that that's number one thing. I think small business owners should be supporting each other and reaching out to their customers and telling them how to help because people really are focused on this. They just aren't sure what to do.

In terms of the government stuff, yes, you have to stand up and you have to write in on all of these things that sound good in theory, but are anti-competitive to small business. One of the things that I talk about in the book that I think is really important, and unfortunately, nobody talks about it because it is so difficult or pegged as the federal reserve. I mean, so much of the transfer of wealth and so much of the tipping of scale has come out of the monetary policy in this country to the point where it's mind boggling and it's in the trillions and trillions of dollars that we need to have a concerted effort to reign in the federal reserve and put guardrails about how much intervention they can do into the market, because that is really disruptive and really causing this wealth transfer.

And so, if we want not just small businesses to thrive, but if we want individuals to be able to create wealth in this country via owning a home, via investing in the stock market, investing in your own business, you need to be standing up for these kinds of things. I know it's not fun. We all just want to be left alone, but unfortunately, that's the outgrowth of all of us wanting to be left alone is that we have this behemoth. I'm certainly open to other ideas. So if you have one out there, let me know, but we have to tear this stuff down.

Tom Wheelwright:

Let me throw you one, Carol.

Carol Roth:

Awesome.

Tom Wheelwright:

We're all about how to do something, not whether I can do something, because that's the way entrepreneurs are, right? I've never met an entrepreneur that wants to know what they can't do. So, what we want to know is how can we do it. We have a magical thing in the Constitution called equal protection under the law, which means that you can't treat different businesses differently and walk, which that means that let's say, for example, you don't like the tax consequence of operating the way most small businesses do, then we can operate the way a big business does. We're totally allowed to do that. Okay. You don't have to be a Walmart to operate like Walmart.

And so, one of the things where I was talking about is, well, look, let's make sure that you've got a team like the big businesses do. Let's be sure we're thinking like big businesses do, and more importantly, which is something that you're doing, and I really appreciate what you're doing, and that is to get the financial education to understand what is going on so that you can actually… My good friend, Robert Kiyosaki says, “Don't get rid of the fed, be the fed. Okay. Learn how to do what the big guys do.” I think that's actually something we're going to have to do more and more. If the government's continually promoting thing things the way the big guys do it, maybe we're going to have to start adapting to that and looking at, “Look, if I can't change it for the overall economy, perhaps I can change it for myself.”

Carol Roth:

Yeah, I think that's a good point. Obviously, there are certain things, like you said, with the structures and tax codes that are very opaque and that experts like you can help teach us, which we should do. There are other things, whether it's regulatory capture or just the amount of capital that a small business can take on that were not going to be able to shift with those kinds of things. I think the other thing, too, that we need more legal challenges, and there are some great organizations. Pacific Legal is one of them. There are foundations that are going to be challenging these things. So like you said, in the Constitution, it says you can't do this differently, so let's go out and challenge these things so that we stop getting these right-stomping regulations and mandates that are put out there. I've been encouraging small business owners that if they feel like their property was taken for the public good and they did not get their eminent domain appropriate compensation, they should go out and sue.

Tom Wheelwright:

That would be an interesting class action, wouldn't it?

Carol Roth:

I think you'll see it. I do think you'll see it.

Tom Wheelwright:

I'm not a big lawsuit guy, but I think that's a good idea.

Carol Roth:

No, I'm not either. I hate it. But in this case, it is entirely warranted and it's the only thing that's going to stop this. When you challenge these ridiculous laws, not only does it take them out of effect, but it starts to tell the politicians like, “There's a line here. You can't cross that,” which I think [crosstalk 00:29:40].

Tom Wheelwright:

I think what we learned from GameStop and AMC, et cetera, is that the small investor can have an impact if we get together and have the impact together.

Carol Roth:

Absolutely. Amen.

Tom Wheelwright:

Carol Roth, thank you so much for joining us. The book is The War on Small Business. I highly encouraged everybody, pay attention to this. This is an all out war and it's not going to end pretty. Okay. If we're not diligent, we don't get the financial education, we don't learn these things, it is not going to be pretty because what would the United States look like if we had no small business? By the way, if we had no small business, we'd have no Amazon, we'd have no Tesla, just remind everybody, we'd have no Walmart because they all started as small businesses. So sometimes I think they forget that that's how they started, and we just need to remember that really this country is all about small business. So, thank you, Carol. Great to have you on. Congratulations on the book. Just a terrific topic and thank you so much for sharing it with us.

Carol Roth:

Thanks so much, Tom. Appreciate your advocacy for small business and look forward to fighting the fight alongside of you.

Tom Wheelwright:

Hey, so before we finish, can I ask you one question?

Carol Roth:

Of course.

Tom Wheelwright:

Are you familiar with what's going on in Arizona with Prop 208?

Carol Roth:

I am not.

Tom Wheelwright:

The tax increase?

Carol Roth:

I am not.

Tom Wheelwright:

The voters in Arizona, the voters apparently can do this, voted the people who make more than $250,000 and 80% tax increase last year, all to go directly to schools to bypass the government entirely. Okay. What's interesting is it applies to small business, but not big business. I just want to let you know that, that is out there. So it's not just at the federal level that these are… There is some kind of coordinated attack going on against entrepreneurship. So just remember, it's all about financial education. When we get financially educated, then we're aware of these things. We can start looking at things that we can do. We can get a team around us. We can get advisors around us. When we do that, we're always going to make way more money and pay way less tax. See you next time.

 

Announcer:

You've been listening to the Wealth Ability Show with Tom Wheelwright. Way more money, way less taxes. To learn more, go to wealthability.com.