December 16, 2010 / 7:34 PM / 9 years ago

Businesses say demand, not tax cuts, drives growth

NEW YORK (Reuters) - Small-business owner Susan Povich is eagerly awaiting the tax cuts the U.S. Congress is poised to extend for two more years.

“The less I pay in taxes the more I invest in my business. Every dime that’s not taxed is going back into capital investment,” said Povich, whose business trucks fresh lobster from the docks of Maine to customers in New York and Washington.

But Povich, who expects her revenue to grow 80 percent next year, says it is demand, not taxes that is the main reason she is expanding next year.

Like many small entrepreneurs, she says the tax cuts will help but will not dictate her business plan.

“I don’t think they will matter much at all. I have such confidence in my business that even without the tax cuts I would have taken the money off my home line,” she said, referring to a line of credit on her home mortgage.

A deal that President Barack Obama struck with Republicans sailed through the U.S. Senate on Wednesday. If passed by the House of Representatives as expected on Thursday, it will allow tax cuts that would have expired at the end of 2010 to continue through 2012.

The deal aims to stimulate the sluggish U.S. economic recovery, but the question is whether it can help unleash optimism and unlock the cash piles companies are sitting on.

Businesses held $1.9 trillion in cash and other liquid assets as of the end of September, according to Federal Reserve data. Cash made up 7.4 percent of the companies’ total assets — the most in 51 years.

Big businesses, as well as small, say, however, that lower taxes will be no panacea for the economy.

Passage of the bill would give businesses more clarity on taxes to plan ahead, but pointing to uncertainty as a reason not to invest “was an excuse,” said James Tisch, chief executive of Loews Corp, the conglomerate whose businesses range from hotels to energy and financial services.

“There’s another problem. Final demand. If there is no final demand, why would a business invest?” he said.

INCENTIVES FOR GROWTH

Some economists predict the tax package could boost economic growth by up to 1 percentage point next year, citing in particular a one-year cut in the payroll tax.

The tax bill also includes an expanded incentive for businesses that would permit them to write off 100 percent of the cost of capital investments in 2011. Povich, for example, said the provision would enable her to buy three lobster delivery trucks instead of two in 2011.

But whether lower taxes will translate into more hiring remains a big unknown. Bringing down an unemployment rate that has stayed stubbornly near 10 percent for months is considered key to restoring the economy’s health.

Bill Dunkelberg, chief economist at the National Federation of Independent Business, which calls itself the “voice of small business,” said he doesn’t see a surge in hiring going into next year following the tax deal.

“The bottom line is, people are not hiring a worker until it looks like they can earn their pay. Only if the consumer becomes more optimistic, only if that happens will they have a reason to hire someone,” Dunkelberg said.

Republicans who had argued in favor of extending tax cuts for even the wealthiest Americans earning more than $250,000 a year — a component of the deal that Obama had originally opposed — said many individuals falling into that top earnings bracket are really small-business owners who need tax cuts in order to invest.

Some 75 percent of small-business owners file their taxes as individuals rather than as corporations, according to the

NFIB.

With the highest income tax rate remaining at 35 percent instead of reverting back to 39.6 percent, such an owner would save $46,000 on every $1 million of income — enough to hire a worker.

“This is a big thing that is driving optimism, that is driving renewed enthusiasm about small businesses,” said Michael Alter, president of SurePayroll, which provides payroll services for 30,000 small businesses.

A November survey of his customers showed optimism at 63 percent in November, up from 57 percent in October. Alter said it would likely climb again in December due to the tax deal.

But some businesses say boosting their payrolls is an issue that transcends tax rates.

Perfect Printing, located in southern New Jersey just outside Philadelphia, has yet to see a pick-up in demand after it cut staff from 55 to 45 in the past two years as sales slowed.

As for the impact of the tax cuts, the print shop’s president, Joe Olivo, said, “I can’t say I would hire somebody.”

Additional reporting by Richard Cowan; Editing by Leslie Adler

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