It’s no secret that I’m a cheerleader for self-employment and entrepreneurship. I now run two blogs, this one here on the Saverocity network and another at freequentflyerbook.com. I’ve never asked anyone permission to start a business, I don’t have a “business license,” I just run a business like a goddamn American. That’s the spirit I’m trying to promote here: if you aren’t willing to start a business until you’re convinced you’ll be able to replace your salary as an employee, you’ll never start a business and you’ll never be an entrepreneur. The only way to start a business is to start a business.
Moreover, there are a number of factors that should make our times a golden age of entrepreneurship:
- comprehensive health insurance is now affordable to entrepreneurs through the expansion of Medicaid and subsidized insurance on the Affordable Care Act exchanges. So-called “job lock,” which kept people slaving away as employees instead of implementing their small business ideas in order to retain access to affordable health insurance should be a thing of the past: today you should be able to start a business with no income whatsoever, and graduate from Medicaid, to subsidized exchange health insurance, to unsubsidized exchange health insurance. While pre-ACA only those confident or stupid enough to go without health insurance, or young and male enough for insurance to be affordable, could ever dream of venturing out on their own, today anyone should be able to quit their job and immediately enroll in comprehensive health insurance with premiums, deductibles, and co-pays corresponding to their income level;
- on the flip side, employee benefits have gotten stingier and stingier as conservative ideologues do everything they can to strip employees of the protections unions and defined benefit pension plans used to provide. While waiting for a pension to vest and seeing your benefits in retirement grow and grow used to be a compelling reason to stick with a unionized workplace for as long as possible, the gutting of both unions and retirement plans in the private sector has made self-employment relatively more attractive than becoming a “company man;”
- meanwhile, current public market asset prices are so elevated that it’s reasonable to expect relatively low returns on investments in publicly traded securities. If you don’t have enough money or contacts to subscribe to one of the few high-quality venture capital funds, you can do the next best thing: start your own private business, and keep every dollar you earn.
What happened?
Given the confluence of factors above, why is it that I still need to be out here in the wilderness shouting at people to start their own businesses? I don’t have a definitive answer, but I do have some suggestions.
- the refusal to expand Medicaid in many Republican-governed states has created an enormous obstacle to affordable health insurance. Instead of being able to seamlessly transition up through Medicaid eligibility to subsidized and then unsubsidized exchange coverage, these states are left with an enormous coverage chasm. If an entrepreneur knows that she’ll be left without affordable, comprehensive insurance coverage if she becomes pregnant, let alone suffers a serious disease or injury, under what possible circumstances would she risk that?
- Businesses are privileged in the provision of certain benefits. Everyone knows about the exclusion of health care benefits from taxable pay, but there are other considerations as well: when employers match contributions to 401(k) plans or HSA’s, the benefit to participants is subsidized by the contributions of non-participants. In other words, an employer that matches 3% of payroll contributions to a 401(k) isn’t spending 3% of payroll on 401(k) matches. They’re only matching the contributions of participants in the plan, reducing the overall impact on wages of the employer match. While the self-employed are free to open 401(k) accounts, they’re solely responsible for both the employee and employer contributions to the plan. An obvious solution would be to create a generic retirement plan open to everyone, whether employee or self-employed, which would reduce or, preferably, eliminate the role of the employer in our retirement savings regime.
- In connection with the above, businesses which provide paid family or maternity leave have an advantage over the self-employed, since entrepreneurs have to pay for their benefits out of retained earnings (or debt), instead of spreading the cost over an entire workforce. An obvious solution would be to support a universal paid leave policy funded by a modest increase in payroll taxes on all workers, whether they work for themselves or for someone else.
- Bureaucratic malfeasance. There is an important difference between regulation (good) and implementation (typically terrible). It’s the difference between getting a facility inspected and approved before using it to prepare and sell food and requiring 30+ days to get an inspector on site to inspect and approve your facility. It’s the difference between requiring a license to drive and requiring people to wait in line for 2 hours to get their picture taken for their driving license. It’s the difference between requiring entrepreneurs to register for an account to pay estimated taxes quarterly and requiring entrepreneurs to get their bank to notarize a form before getting their estimated tax payment account approved.
- Finally, the self-employed are treated with suspicion and disdain by most civic institutions. If you follow me on Twitter you’ve probably seen me talk about this anecdote before, but it is absolutely representative of the general experience of being an entrepreneur. The Brookings Institution and the American Enterprise Institute recently released one of their “consensus” proposals on a program for paid family leave. On page 25 of the report, you’ll find the following paragraph: “Requiring that employers protect the job of a worker who takes leave is desirable (see Chapter III), but sensible restrictions on eligibility and work history will ease the burden on employers, especially small
businesses, and reduce workers’ ability to abuse the system. Expanding the coverage to the self-employed is potentially vulnerable to fraud and misuse.” I was fortunate enough to attend the presentation of the report (if you listen or skip to the end you can hear me ask the panel about this apparently deliberate insult to the self-employed). Why would anyone, let alone an organization ostensibly dedicated to free enterprise, accuse entrepreneurs, the very people whose risk-taking is the backbone of a competitive capitalist economic system, of fraudulently misusing state programs of support? What would it even mean to fraudulently misuse paid family leave? Faking a pregnancy? This is the United States of America, not a long-running Broadway musical.
We can fix this, but we have to decide to fix it first
If we want to promote entrepreneurship and self-employment, there’s nothing standing in our way. Start with asking actual entrepreneurs a few questions: what obstacles did you face while starting your business? What could be done to help others pursue self-employment? I’ve provided some answers, but I don’t have all of them. Maybe tax attorneys face different issues than restauranteurs, who face different issues than artists, who face different issues than musicians, who face different issues than garment retailers, who face different issues than mail scanning and forwarding services. There may not be a single solution to the problems faced by entrepreneurs in different industries. It may take time and ingenuity. But the first thing required is discovering the issues that entrepreneurs face and tailoring solutions to make entrepreneurship a real possibility for more people who are discouraged by the misuse and abuse of small businesses by the American political system.
The potential for fraud related to paid family leave for the sell employed is obvious. Maybe you should think about it a little more, from a few different angles, before you’re next rant.
SC Parent,
I suggest learning a bit more about this issue. The most generous federal paid leave proposal I’m aware of is the FAMILY Act, which you become eligible for along with Social Security Disability Insurance, i.e., you need a fairly lengthy, consistent, and recent work history. Benefits are funded by a 0.4% tax (half paid by the employee and half by the employer, with the self-employed paying both halves).
In order to “abuse” this system not only do you have to become pregnant and give birth (no mean feat), you also will have to pay taxes on your fake income! The maximum benefit is $4,000 per month, which is 66% of $6,060. Adding the 15.5% FICA back in results in $7,172 in gross income. Faking $7,172 in income leaves you paying $1,111 in FICA taxes alone. Since the benefit calculation is based on calendar-year earnings, you’d need to pay a total of $13,332 in taxes in order to receive the maximum benefit, which is $12,000 (3 months at $4,000 per month).
Now, I’m not denying there are probably bend points where EIC makes up some part of the difference between taxes paid and benefits received. If you have enough kids you might even come out ahead. But at that point if you’re savvy enough to “abuse” this system you’re probably savvy enough to realize that the juice isn’t worth the squeeze.
—Indy
Maybe you should think a bit about the fact that there are ways to check for fraudulent claims, before getting on your high horse.
There is no more potential for fraud there than in an employment situation, just as there is no more potential for fraud in short and long term disability claims.
But the self employed ARE discriminated against, both in taxation, and in such things as benefits, despite the fact that they (we) are an overall boon to the economy. When I was severely injured in 2014, and was unable to work for weeks, then unable to work my usual 60+ hour weeks d/t severe sequelae, I collected $0 for loss of income from my insurance company.
Agree with the premise that entrepreneurs are unfairly burdened, which creates a barrier to entrance. Given the number of ventures that fail, I sometimes I waffle on whether I consider it hormetic. I suspect the first, largest hurdle is fear, somewhat unrelated to true financial risk. Behind that, it’s probably requiring minimum wage plus benefits to employees – which is of enormous advantage to larger companies. It is also why much less perfect solutions are sometimes found. These include offshoring (AskSunday, GetFriday), contracting (Elance), or TaskRabbit (like Uber for tasks).
ed,
First, I absolutely agree that fear is a bigger obstacle than actual financial risk for many would-be entrepreneurs. But many of the burdens of self-employment and sole proprietorship are only knowable once you get started: barriers to growth and expansion, not barriers to entry. For example, given the constant political rhetoric about the virtues of small businesses, I had no idea that it’s virtually impossible, not to say illegal, to hire an employee by hand, instead of hiring a payroll service to handle it (I had a reader a few months back who said this was a good thing so entrepreneurs can spend more time on their businesses rather than taxes, completely missing the point).
My feeling is that there are enough psychological barriers to entrepreneurship that we don’t need to go piling on with more. Those who are able to overcome fear and indecision enough to get started should have their way paved, rather than throwing up additional bureaucratic barriers at every turn. To use the hiring example again, before you hire your first employee you need to create an account with the Social Security Administration, the IRS, EFTPS, and E-Verify. All the money goes to the same place! But the federal government can’t bring itself to create a single point of entry to handle withholding, payment, and work eligibility. That’s not the entrepreneur’s fault.
Likewise, to this day I have no idea how to calculate or pay state taxes, because every state buries information for entrepreneurs and the self-employed too deeply for a reasonable, busy person to find in reasonable amount of time. Not a problem if you’re willing to pay Turbo Tax to handle your taxes, but a catastrophic problem for states (which don’t get my tax revenue) and for entrepreneurs who waste time looking. More than that, though, the harder you make entrepreneurs’ lives the fewer entrepreneurs we’ll have and the less faith entrepreneurs will have in their government. The first lesson a businessperson learns is to make it as easy as possible to get paid. When the government has the attitude that they should make it as hard as possible to get paid, they naturally lose the confidence of businesspeople.
—Indy
Regulations are almost always tailored towards larger businesses, and written as well as implemented in ways that make compliance somewhere between extremely inefficient and practically impossible for businesses with 1-5 employees. Larger businesses get a very positive (for them in the short term) side effect in a regulatory environment that works to make sure that the talent they have invested in doesn’t quit to become competition.
Unfortunately, neither Major League party shows any interest in improving this. One wants to roll back portions of regulations to make the biggest of businesses happy, which rarely if ever helps the smaller guys. The other one can’t seem to turn down an opportunity to meddle in ever more aspects of business without ever adressing the awful implementation of existing regulations. Example: the crazy silly health questions update I have to go sign every time my son’s orthodontist needs to look at his braces. Literally, there are times that we’ve been in there two weeks before and that formality is the longest part of the visit.
I’m self-employed with one employee, and my wife is also self-employed. We wouldn’t have it any other way, but no thanks to any government program that actually helps.
Kenny,
Thanks for sharing your thoughts. I believe that both parties will be open to things like tax simplification and bureaucratic reform if small businesspeople are able to speak with a common set of concerns. That’s one thing I’m trying to achieve with my tweetstorms about the tax code; I want people to get angry about the insane complications which force small businesses to hire people to prepare their taxes, hire people to handle their payroll, hire people to handle their health insurance side business, etc. Trivial expenses for a larger business, crippling for a small or growing business.
Both parties pretend to address these concerns by, on the right, cutting taxes to try to buy off small businesspeople (without addressing the underlying problems), and on both sides by exempting employers from regulations based on their size, creating the absurd situation of punishing businesses for getting larger. The real solution is a simple set of rules that businesses small and large can follow with minimal hassle so they can focus on the business of their business.
—Indy
Maybe the answer to the questions you pose lies in the fact that most entrepreneurs and small business people like to believe that they are in charge of their own destinies and are uncomfortable with the notion of collective action; the exceptions being those in exurban and rural areas that suffer from “big-fish-in-small-pond” syndrome and are eager to support whatever the Chamber espouses as a way of enhancing their own narrow self-interests.
Why are you not advocating that entrepreneurs join an existing organization (if one exists) that advocates for what you propose? Again, it’s this delusional attitude that so many entrepreneurs, small business people, and FIRE devoteees have that they can individually control their own destiny without getting mired in the messy realities of democratic decision making and collective action.
hanaleiradio,
I think you’ve hit the nail on the head when you say “if one exists.” There are a number of organizations that identify themselves as supporting small businesses but in fact have been compromised by the political parties. On the right there’s the Chamber of Commerce and National Federation of Independent Businesses, which are simply a wing of the Republican party. Likewise on the left the Democratic party has taken over the Small Business Majority and Main Street Alliance, which now promote a whole range of traditional Democratic views.
What I want to see is a reorientation of small businesses away from the left-right axis and towards a politics supportive of entrepreneurs and entrepreneurship. Instead of calling for tax cuts, call for tax simplification. Instead of trying to privilege small business by exempting them from regulations, stop connecting benefits to the workplace by eliminating the special tax treatment of benefits only large employers can afford to offer. Businesses have enough on their plates; why turn them into health insurance companies on the side?
I agree that many small businesspeople wholeheartedly endorse the “I built that” attitude. Frankly, I think they need to get over it and come to terms with reality.
—Indy
Excellent points all around