Episode 87: The Attack on Small Business with Karen Kerrigan

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

Tom Wheelwright:

Welcome to the Wealth Ability Show where we're always discovering how to make way more money and pay way less taxes. Hi, this is Tom Wheelwright, your host, founder, and CEO of Wealth Ability. So over the past year and a half, we've seen big businesses just soar and small businesses get hammered. First, in the pandemic, and now under the new administration's tax policies and other business policies. And I am so thrilled today because we're going to be able to look at the policy behind this. What's really going on. We're going to dig deep into it, and we have a really, truly expert on this. Karen Kerrigan, who's with the Small Business and Entrepreneurship Council, and I am so excited to have you, Karen. Thank you so much for being here. Hey, would you just give us a short bio? What do you guys do and why? Why are you talking about this stuff?

Karen Kerrigan:

You bet. And thank you for having me today. It's great to join you and your audience of small business owners and entrepreneurs. SBE Council, we are an advocacy research and education organization. We have more than a hundred thousand members throughout the country. We're dedicated to protecting small business, promoting entrepreneurship. I mean, we do … mostly what we focus on is advocacy. Advancing policies that are going to be good for small business growth and competitiveness, and to encourage more entrepreneurship across the country. So we've been doing this for 27 years, not only at home, but around the world. I've traveled globally, everywhere, working with governments on what they can do to encourage entrepreneurship, investment, wealth creation, to make their countries more small business friendly from a policy perspective.

Tom Wheelwright:

Well, I love that. We are on the same side here, Karen, for sure. And so are our listeners. We're all on the same page here and I'm so excited to have … it's good to know that there are people out there advocating for small business and that it's not just these big businesses that are trying to, and literally are taking over the world.

Tom Wheelwright:

So let's start if we can, Karen, with the pandemic. So here we had policies that it's okay for Target to stay open because they happen to have a grocery store, but it's not okay for the clothing boutique down the street to stay open because they don't have groceries. But effectively they're the same store, right? Except for the grocery piece, which is really a small piece of Target. So what's going on there? I mean, why would you even do that? I get the mask mandate. I'm actually pro on the mask, on masks. They clearly work and really is all we ever needed to do was wear masks. And I think we would've been fine, but why this policy of really penalizing the small business and encouraging the big business?

Karen Kerrigan:

Well, it was a massive overreaction. And from the beginning of the pandemic, when it first hit in March, I mean, obviously we were very, very concerned, March of last year … when we started seeing these dramatic edicts on business closure and just basically closing the economy. And we said from the beginning, look, small businesses can do this smart and safe. They have every incentive to do this and why it just doesn't make sense to be hoarding more and more people into one location, into these larger stores where you can spread them out.

Karen Kerrigan:

If they could go to the small business of their choice. And, we did see small business pivot very quickly, being able to use technology, being able to deliver, to do a pickup at the store. But the bottom line is, closing these stores was just, was an overreach. And unfortunately, I don't know what the final count is going to be, but millions of small businesses have closed. Many have not reopened, or they're just starting to reopen right now. And there's still a tough road ahead in terms of digging out of the past year. So yeah, it was really unfair to small business. And from the beginning, we were just trying to knock some sense into policymakers, both here in Washington and across the country.

Tom Wheelwright:

Right. I mean, you'll make a good point that how do you social distance when everybody's at Costco instead of going to their other smaller stores where they could socially distance, right? I mean, I think in my little neighborhood grocery store, they had really strict social distancing rules. They have arrows on the floor. Here's how you go, all this kind of stuff in this little teeny tiny store, right? It was a grocery store, so it got to stay open, but all of those boutiques … my wife's very most favorite clothing store in the world, a little Italian owner in San Francisco on Market Street shut down permanently after 44 years because of the mandates to stay closed and the PPP loans were just not enough to keep them open. So, it's one thing that the PPP loans were great for employees, but they didn't cover your inventory costs and they didn't cover all those other costs that you had.

Tom Wheelwright:

So to me, it was just a shame and it was just horrible, horrible policy. But what's disturbing to me is it seems, Karen, to have continued into this new administration. I cannot point to a policy in the new administration that is not anti small business. So what's going on? I mean, why is … Joe Biden, who came across during the election process as middle of the road … I'm going to bring everybody together and now he seems to have gone to, well, it's all about the unions and it's all about the left and we don't have any care whatsoever about small business. In fact, we're going to actually decimate small businesses … we'll talk about that in a minute … with our tax policies. What is going on here?

Karen Kerrigan:

Well, look it, I think even Joe Biden, might've campaigned, as a moderate or said, look, the history of how I legislated and I've been a moderate, but really there was nothing moderate about his policies when you really dug deep into the campaign material. In terms of a lot of the legislation and initiatives that we're fighting against now, you talked about the unions, the ProAct that we are advocating against. A lot of the tax policies as well, raising the corporate rate, raising the individual rate, capital gains taxes, the death taxes.

Karen Kerrigan:

I mean, all these things that are really going to crush small business. And on the regulatory side as well, just a whole host of regulations on every sector of the economy. So we're not really surprised and shocked, where president Biden is right now in terms of proposing and moving forward with these. In fact, he's doubling down and he's including a lot of these policies in places where they typically wouldn't go like the ProAct, the pro union ProAct, going in the infrastructure package. I mean, and so that clearly shows that he's not really for bipartisanship, that he really wants to shove this stuff through. And it is very dangerous for small business. And, look it, they're not in a position right now, to be paying more taxes are dealing with more burdensome regulation when they're digging out of the Covid-19 mess.

Tom Wheelwright:

Let's just start with the unemployment, right? So who gets hammered with this $300 a weekend unemployment? It's the small business, right? It's a small, locally owned restaurant. It's a small business that's trying to hire. You've seen McDonald's for example, offering big bonuses, right. Even just for applying, right? And so they can buy them off, but the small business can't afford to do that. And so now what you have is this … fortunately in Arizona, where I am recently, our governor stopped that. They've got that stopped as of July, and no more $300 per week.

Tom Wheelwright:

I've never liked a big bonus when the economy is open, the economy is open now. So, it's fine when the economy is closed, you've got to take care of those people. And I'm all for that. But when the economy is open and if you … for example, last night, my wife and I we want to go to one of our favorite local restaurants. Lo and behold, it's closed. They've been around for 40 years and they're closed. And if you're not open out in Arizona, you're not going to be open because-

Karen Kerrigan:

I agree-

Tom Wheelwright:

We ended up going to a different, a little Mexican restaurant and it was packed. So that means that there's plenty of people. There's plenty of patrons. There's just not the … let's begin with aren't workers to come in because there's clear … and I'd like to ask you about that is, is the data really that clear that the $300 a week is keeping people home?

Karen Kerrigan:

We think it is. I mean, we think there are definitely the cost in effect is there. And I mean, yes. So this is sort of the big barrier that is hurting many small businesses ability to sort of recover and to ramp back up. And so just like Arizona, thank goodness. I forget how many states, I think 20 some odd states right now have decided to get rid of that 300 unemployment insurance, because it really was holding back the hiring efforts of small business owners. And every single survey that we've seen from the NFIB to the chamber, to all the other business groups, clearly rank access to labor as one of their key issues and one of their key burdens and problems, in terms of them being able to get back on a path of recovery.

Karen Kerrigan:

If you don't have the people to take advantage of this recovery, right … then you can't begin to dig out. So yes. And luckily we're seeing some action on that at the state level. And I think that's causing a lot of momentum here in Washington to rethink the 300 and just let it die, let it die when it expires.

Tom Wheelwright:

Now, unfortunately, it doesn't expire until September. Right.

Karen Kerrigan:

I know, but there were those calling for that to continue-

Tom Wheelwright:

And that's true. You know, it's been interesting to me because to me, the $300 bonus is really a trial of a universal, basic income, right? That's a trial. What will happen. And I was frankly surprised to see how many people would stay home rather than go to work. Like my son, he qualified. He says, I want to work. Right. So, but that's his nature. He's an entrepreneur by nature. He comes by it naturally. And, but I thought more people would be like that. So it was actually a little surprising to me. I actually thought maybe it was a worthwhile trial to see what would happen. Now we know, right. Universal, basic income doesn't work.

Karen Kerrigan:

Yes.

Tom Wheelwright:

As long as you have jobs, right? I mean, if you don't have jobs, that's one thing. But as long as you have jobs, that's a whole different animal.

Tom Wheelwright:

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Tom Wheelwright:

So if we can, Karen, let's turn a little bit to my favorite subject, which is the tax topic and what these policies, the capital gains tax in particular, the 1031 exchanges, which is to me, an attack on small business … from your standpoint, and from what you're seeing, how would these policies, what would they do to small business?

Karen Kerrigan:

Well, they would have a direct negative impact. It was interesting to me. I was watching the small business administration administrator, Isabella Guzman, testifying before the house small business committee this weekend, and Republican members were asking her about these tax policies. And she said, “Oh, they'll absolutely will not impact small businesses. They will absolutely not, whether it's capital gains, corporate, individual … it's the smallest, it's only the wealthy, it's only the big corporations.”

Karen Kerrigan:

Well, that's absolutely wrong. And she didn't even know that the bulk of C Corp's in this country are actually small businesses. I mean, 96.2% of C Corp's have under a hundred employees. 72.5% have under 10 employees. So raising the corporate rate from 21 to 28% is going to hit these small businesses hard, hurt their competitiveness, their capital they need to invest and grow.

Karen Kerrigan:

Obviously jacking up the individual, the top rate back to 39.7 is going to have a huge impact on entrepreneurs and small businesses. The moderately successful ones, who basically used their profits, plowed it back into their business, right. To invest, compete, and grow. And, on our website, Sbecouncil.org, we have a great piece. It's right on the front page where our chief economists Ray Keating goes through the numbers. And he said, look, if for every big corporation that's impacted by all of these tax proposals, 108 small businesses are impacted by these tax proposals. So, and that's direct. That doesn't even include the capital gains tax. And some of these others that really hurt capital formation, the incentive to invest in businesses. So it's going to really hurt small businesses directly, our economic recovery, and therefore the environment, right. The whole environment that small businesses need in order to grow survive, and hopefully thrive.

Tom Wheelwright:

Yeah. So I actually have a theory. I actually think this is intentional. And I actually think it's intentional by the big businesses. And I think the big businesses are actually getting government to do their dirty work. And here's my theory. Okay. See what you think. And I'm not a conspiracy theorist at all. I just, for the record, that is not where I come from. What I'm looking at is the actual effect of the policy. So let's say for example, that you were an employee and you put in and you saved your money diligently, you funded your 401k to the maximum amount policy possible. And when you turned say 65, you have $2 million in your 401k. Okay. The effect of this capital gains tax by the way is as if the day you turned 65, the government took and taxed that entire $2 million at the marginal rate that you had that day. Okay?

Tom Wheelwright:

Because when you consider a small business owner, we small business owners. I'm one. I have four different small businesses that I run, and you can consider a small business owner. We put all of our money into our business. That is our retirement. And then how do we retire? We sell the business. Well, if we have a 40% capital gains tax, then the day we sell the business, even though we've never made over 400,000, even if we never made our $400,000 a year ever. Okay. But with, right now we're looking at multiples of like six to eight times for the sale of a small business. It means that the day we sell our small business, we are automatically in that top rate. And we've got 40% of all that money we've saved being taxed at that point, even if we don't take it for years and years and years.

Karen Kerrigan:

That's right.

Tom Wheelwright:

Okay. And to me, that is a coordinated effort. On top of that, now let's talk about this. Absolutely, in my mind, abhorrent policy idea to tax capital gains at death, okay. This would be, on my mind, the worst attack on small business, in the history of the United States, because consider that means that you would literally, most small businesses would be forced to sell … the heirs would be forced to sell the business. They're going to sell it in a fire sale and who's going to buy it? The big business. They're going to buy it.

Karen Kerrigan:

Right. Maybe developers. Yes, absolutely big ag, big agriculture when it comes to-

Tom Wheelwright:

Big agriculture is just going to come in and sweep up and buy the small farms. Big business can come in and small by the small businesses and that's what's going to happen. And they're just, and the rich will get richer. So this, this whole dialogue by the administration that, oh, well, we're really going after the rich is really, to me, just a smoke screen because the truly rich get much richer under all of the policies that we're looking at. I actually think that Jeff Bezos and Bill Gates and these guys are just laughing and they're going, this is so cool. We can never do this on our own, but thank you, Biden administration for doing this. And I'm not anti Joe Biden per se. I'm actually not. And yet these policies are so, but I'm so pro small business. I think that were all of these policies to pass, I think it would spell the end of small business in the United States. Tell me your thoughts on that.

Karen Kerrigan:

Oh, it would absolutely be crushing. And look, as it is with the death tax, right. It is very difficult with the death tax without the elimination of stepped up basis would just be crushing. So as it is with the death tax, a lot of businesses don't make it to the next generation, right? Business owners, they have to spend lots and lots of money, hire lots of people in order to make it happen. And that costs a lot of money. And a lot of people can't do that. So they end up just selling it outright. It doesn't go to the next generation. If you eliminate stepped up basis where you're just taxing, applying that capital gains tax to when someone who maybe bought a building that's worth 10 million now 40 years ago, say for $50,000, right? Or $25,000 in an urban area where are the heir's going to come up with that money to pay for that? I mean, so look it, this is going to be a massive wealth transfer to the government and a massive wealth transfer to wealthy people.

Tom Wheelwright:

Yeah. I mean, that's the thing, the people who get … the government gets money, but I think in the end the government loses money. And the reason is because investing in small business is such a cheap investment for the government and they get so much out of it. They get employment. They get the taxes on the employment, on the wages they get-

Karen Kerrigan:

I agree with you. I agree with you-

Tom Wheelwright:

Tax on the profits. I actually think this is a net loser, the government, the capital, the whole capital gains scenario between the … now, if you want to tax Wall Street transactions at a 40% rate, go for it. I don't care. But when you're talking about small business, small farms, the people that you and I care about, Karen, I think that this is … I think it's going to be very discouraging for anybody to go into business, frankly, if any of these policies pass.

Karen Kerrigan:

Well, I think the good news, particularly on this capital gains tax and eliminating stepped up basis, it's even too radical for some Democrats. And particularly those, we've heard from senators, from those farm states or from other states, that are like, wow, this really, really goes too far. But now they're asking them, what can we exempt small farms? We can't get to this where we're starting to exempt types of industries. If it's bad for ag, it's bad for all.

Tom Wheelwright:

Right.

Karen Kerrigan:

And so I think we're making some headway on educating on that issue. Look it, we're for eliminating capital gains taxes and death taxes. We think the perfect rate should be zero on both.

Tom Wheelwright:

Of course. And it should be because it's a second tax, right? You already got taxed on the earnings. Now you're taxing it a second time. So particularly, frankly, a dividend, the tax on dividends to me, most countries, I'm sure you're familiar with this, but most countries that I've studied either have a deduction at the corporate level for dividends or there's no tax at the individual level when they receive the dividends, because that income's already been taxed once. Now you add a capital gains tax on top of that, you effectively double, triple tax all of the income it's earning.

Karen Kerrigan:

Well, now, as you know, we're for sort of a global minimum tax, right? We're encouraging countries throughout the world to tax more and to come up with higher taxes. And you know, this really goes against everything the U.S. Has been for in terms of encouraging entrepreneurship, free market capitalism. As far as I've been around, working across administrations, Biden, Bush, Clinton, the State Department has sent me everywhere. We've talked about the ease of doing business and what we need to do to foment democracy and free market capitalism is lower taxes and lower regulation. So, the World Bank Report comes out the ease of doing business. The countries that have less taxes, less burdens, are easier to do business. So now, but we're moving in a radical direction now. And this is very, very scary. And that's why we need business owners and entrepreneurs, your listeners, and your self, just continuing to weigh in on this issue to point to the dangers of this. We're going to need your help definitely this year to fight back some of these proposals.

Tom Wheelwright:

Let's talk about that. What can we do? What can the small business owner do? What can the entrepreneur do to make a difference in these policies?

Karen Kerrigan:

They have to use their voice. They have to contact their members of Congress. They have to advocate for themselves and for their business. I know this is not what they do. It's very difficult right now in terms of rebuilding their business, transforming, pivoting, but their survival of their business depends on these policies. And at SBE council, we make it very easy to do. If you want to sign up for our e-news small business insider, you go to our website, sbecouncil.org. We'll keep you appraised of all the policies that are happening, the action that you can take, who you need to contact, when you need to write comments, if you need to contact your Senator, your House member. We make it very easy to do so. And we really count on our members, their voice to come testify for us on Capitol Hill, to write comments. It really does make a difference when small business owners and entrepreneurs weigh in.

Tom Wheelwright:

Amen to that. And I'm in Arizona. We have two democratic senators, either one of them votes against this and it's dead. So, certainly if you're in Arizona, you're in a state, you're in Georgia, you're in a state that is narrowly … your democratic Senator near narrowly won. The Republicans clearly aren't going to go for this, so we're pretty safe for the Republicans it seems like, but there are some Democrats that we really need to pay attention to. They're probably some Republicans too, but to me writing your Senator, I've never proposed that so much as I have this year, just because I think they'll listen. I do. I think they're going to end up listening.

Karen Kerrigan:

And particularly in a state like Arizona, as you mentioned, with Senators Sinema and Kelly, the left is relentless with them, in this regard, in terms of trying to push through a lot of these agendas. And, but Sinema for example, has stayed firm on the ProAct and some of these other bills. And I think Kelly is there as well, but that's why pressure matters from small business owners to be the voice of reason, the voice of common sense, because the pressure on all these senators is tremendous. And we've just got to outwork. We've got to outwork the bad guys on these policies in order to hold back the tidal wave of bad things that can happen to small businesses.

Tom Wheelwright:

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Tom Wheelwright:

As we start to wrap up here. And thank you so much for your time. Just one little note. So I actually, some of these run numbers and I've confirmed them. If you were in California and let's say you invested early on and you got founder shares in a business and you die with those shares. And let's say they're worth a hundred million dollars. So I'm not going to run through the math here, but I don't know if you've seen that, Karen … do you have any idea, based on all the proposals, how much the heirs would end up with out of that a hundred million?

Karen Kerrigan:

They'd probably have to pay 80 to 90 million of that.

Tom Wheelwright:

98 million, they would pay in taxes. 2 million would be left.

Karen Kerrigan:

Well, the only reason I sort of was close was because we've run some examples as well on $20 million estates, 30 million for small businesses. That's crazy. Like I said, it's confiscation.

Tom Wheelwright:

Unbelievable. I mean if you consider a hundred million dollars and $98 million goes to the government. And here's the problem, here's my fundamental challenge. And that is that since when does the government ever do something better than the private sector?

Karen Kerrigan:

Never.

Tom Wheelwright:

I mean ever, do they do something better than the private sector? So, okay. Yes. Defense, we need. Roads, we need. Those things we need in the public sector. Education, probably, although I'm not only overly convinced there because we're getting better and better charter schools and private schools.

Tom Wheelwright:

But my point is is that you get leverage with private enterprise that you don't get. Government does something, and the best they get back for a dollar of expenditure is a dollar of production. Whereas, if what they're doing instead is encouraging entrepreneurship, they may give a dollar, but get back $10 in production. And so I'm just such a big fan of entrepreneurship. I think this is what made America great. I think it's the only thing that keeps America great. It's what makes America different from every other country in the world is the emphasis on entrepreneurship. So I want to thank you, especially Karen, for what you're doing and the SBE Council. I would encourage everybody to go to SBE Council and tell us where we can find you, how we can, and what we can do to, again, what we can do to help you do your job?

Karen Kerrigan:

Oh, and thank you for giving us this platform today. Yes. SBEcouncil.org, our website. Sign up for e-news, our small business insider, a great weekly recap of what's happening in Washington, plus a lot of good tips and trends to help your business grow and succeed. On Twitter @SBEcouncil, Facebook, SBE Council. We're really easy to find. LinkedIn, SBE Council, whatever social media platform you use, we're there. And we'll alert you when we need you to weigh in as well. We need more small businesses in this fight up on Capitol Hill, and we look forward to engaging with all your listeners. And thank you so much again for having me on.

Tom Wheelwright:

Well, thank you, Karen. This is, I think, I think this is a turning point in the history of the United States. And I think that we have to unite … entrepreneurs tend to do our own thing, right? But this is one case where we need to cooperate. We need unite because otherwise the reality is, is that we're not talking about little tiny policy changes. We're talking about policy changes that make what we used to think of liberal look conservative.

Karen Kerrigan:

Yes.

Tom Wheelwright:

And it's not that it's liberal or progressive. It's none of that. It's just that it's decimating to the entrepreneurial spirit. And so anything we can do. Thank you, Karen SBEcouncil.org. Please, please, please write your senators. Make sure that we all get involved in this because that's the only way we're going to continue being who we've been, and having the opportunities we've had because otherwise I think some of these policies are so devastating that the only thing that will be left, frankly, is you're going to get to go eat at a chain restaurant.

Tom Wheelwright:

And you'll never ever going to be able to get to a local restaurant again. You're never ever going to get to a small, you want a local accountant. You're never going to find them. You want a local, a little boutique shop to buy clothing, not going to happen. So remember all of these, that's not just you, right? It's not just us and our business. It's how is this world going to end up? And remember when we do this, when we get involved, when we actually, and I'm not really normally politically motivated, but in this case, I'm entrepreneurship motivated. And when we do that, what the end result of our actions will be way more money and way less taxes. We'll see you next time.

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