The rate of small business creation in the United States has suffered in recent years, and a subcommittee in the U.S. House of Representatives wants to know why.

Dr. John Deskins, director of the Bureau of Business and Economic Research at the West Virginia University College of Business and Economics, was part of that discussion last week in Washington. Deskins testified Sept. 11 before the Small Business Subcommittee on Contracting and Workforce to examine the declining rate of small business creation over the past 30 years and the state of entrepreneurship during this latest economic recovery.

The subcommittee noted that in 1978, the rate of new business creation — the number of new businesses created for each existing business — was 12. Today that number is 7.8, the subcommittee said, although that number is up from 6.2 in 2011.

“Numerous statistics from the U.S. Small Business Administration and other sources suggest that small businesses play a vital role in our economy,” Deskins said. “For instance, statistics based on standard SBA definitions indicate that small firms represent the large majority of firms in the nation; small firms employ around half of the total U.S. private sector workforce; and small firms have historically counted for more than half of net job creation in the U.S. Further, academic research has demonstrated the importance of small business to economic growth using advanced statistical methods. Recent research has rigorously demonstrated that new business formation is not simply correlated with a growing economy, but is indeed a key driver of economic growth.”

Deskins said that declining rate of new business formation “is a significant concern as it relates to innovation and long-run economic growth,” and noted the findings of investigating a variety of tax and expenditure policies.

“Federal income tax rates and credits do matter. Research has convincingly shown that relatively more favorable tax policy toward the self-employed, compared to wage and salary workers, increases self-employment,” he said. “Other tax policies are also found to matter in recent research. For instance, research has shown that greater deductibility of health insurance premiums for federal income tax purposes likely reduces exits from self-employment.”

Deskins noted recent research shows that young firms are most important for long-run economic prosperity, not necessarily small firms. He also noted that future research is needed to get to the real causes of entrepreneurial decline.

“Additionally, research needs to investigate further how much of the apparent change in small business activity in response to tax policy is a real behavioral response versus a change in less economically substantive tax reporting behavior,” Deskins testified.

Others testifying at the hearing included John Dearie, Executive Vice President, Financial Services Forum; Chad Moutray, Chief Economist, National Association of Manufacturers; and Jonathan Ortmans, Senior Fellow, Kauffman Foundation.

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CONTACT: Patrick Gregg, WVU College of Business and Economics
304.293.5131, Patrick.Gregg@mail.wvu.edu

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