Stagflation has arrived, just in time for National Small Business Week. The Commerce Department said on Thursday that the economy fell by 1.4 percent in the first quarter, considerably below economists’ expectations. The Commerce Department said on Friday that the Personal Consumption Expenditures price index, the Federal Reserve’s favored inflation barometer, climbed at its quickest rate in more than 40 years. Stagflation, which the economy hasn’t seen since the 1970s, is the result of a declining economy and soaring prices.
Biden Blames Technical Issues for Stagflation
President Biden replied to the GDP fall by blaming “technical issues,” Russian President Vladimir Putin’s conflict in Ukraine, and the lingering impacts of the COVID-19 epidemic, rather than accepting responsibility for his own actions. He attempted to divert attention away from it by claiming credit for a “small business boom” of new firm development as the epidemic faded. Nonetheless, according to Job Creators Network’s Small Business IQ study, just 13% of small businesses harmed by the epidemic have fully recovered.
To the degree that small firms are returning, it is despite, not because of, Biden’s initiatives. And if Biden and congressional Democrats get their way, the inflationary and economic headwinds that these businesses face will only worsen. That is the true significance of National Small Business Week.
Democrats are trying to enact meaningful legislation before the November midterm elections, and it appears that tax increases are on their policy craps table. Biden’s recently unveiled budget proposes $2.5 trillion in tax increases. His ideas include boosting rates on more than 1 million small firms constituted as corporations by one-third and considerably increasing the tax burden on successful small enterprises classified as pass-throughs.
Surprisingly, congressional Democrats are promoting tax increases as a panacea for inflation. “If you want to get rid of inflation, the only way to do it is to undo a lot of the Trump tax cuts and raise rates,” Senate Majority Leader Chuck Schumer (D-NY) said last week. Democrats are following in the footsteps of their disastrous Build Back Better strategy, which likewise attempted to persuade Americans that billions of dollars in additional spending will solve the inflation problem.
It’s questionable whether Democrats accept this economic nonsense. More likely, they are simply pandering to Sen. Joe Manchin (D-W.Va.), whose vote is required to pass any legislation – and who prioritizes inflation. What is evident is that they are seeking to divert attention away from the underlying cause of inflation: their own terrible policies, such as irresponsible spending that has depreciated the dollar and generous social programs that have boosted demand while depressing labor supply.
In truth, tax increases would exacerbate inflation and further restrict the economy by stifling small enterprises. Higher taxes disincentivize the development and expansion of small businesses, which are required to overcome supply bottlenecks, lower inflation, and promote economic growth. Tax rises would cause stagflation and an economic downturn.
To recover from the current economic downturn and avoid stagflation, Congress should take the opposite path and extend the Tax Cuts and Jobs Act (TCJA), which resulted in unprecedented shared economic prosperity in 2018 and 2019. The TCJA provisions, such as the 20% qualifying business income deduction, which about 15 million small companies take advantage of each year, have helped small firms to keep more of their revenues and reinvest them in expansion, hiring, and salary increases.
Unfortunately, the majority of TCJA provisions are set to expire after 2025. Making them permanent can provide small firms with the security they need to make investments that will help the economy recover.
Given the possibility of the GOP retaking control of the House and Senate, Republican members of Congress should start thinking about how they might implement pro-small business measures immediately. Aside from making the Tax Cuts and Jobs Act permanent, agenda items should include increasing traditional energy production and transportation to reduce gas prices; deregulation, particularly in the areas of climate and labor, to make it easier for small businesses to thrive; and personalized health care reform to increase choices and lower prices.
A future with measures like these can offer small companies something to look forward to this week and in the next months when the economy is still likely to be in shambles.