Op-EdAppeared in The Hill on May 2, 2022By Alfredo Ortiz

Specter of stagflation arrives for National Small Business Week

NEW YORK, NY - JANUARY 07: Democratic presidential candidate VP. Joe Biden delivers remarks on the Trump administration's recent actions in Iraq at Chelsea Piers on January 07, 2020 in New York City.

Just in time for National Small Business Week, stagflation is arriving. On Thursday, the Commerce Department announced the economy shrank by 1.4 percent in the first quarter — well below analysts’ estimates. On Friday, the Commerce Department revealed the Personal Consumption Expenditures price index, the Federal Reserve’s preferred inflation indicator, rose at its fastest rate in more than 40 years. This combination of a contracting economy and runaway prices equals stagflation, which the economy hasn’t experienced since the 1970s.

President Biden responded to the GDP decline by blaming “technical factors,” Russian President Vladimir Putin’s war in Ukraine, and lingering effects of the COVID-19 pandemic, rather than recognizing his own policies are responsible. He tried to distract from it by taking credit for a “small business boom” of business creation as the pandemic wanes. Yet Job Creators Network’s Small Business IQ polling indicates that only 13 percent of small companies affected by the pandemic have fully recovered.

To the extent that small businesses are coming back, they’re doing so despite Biden’s policies, not because of them. And the inflation and economic headwinds facing these entrepreneurs will only get stronger if Biden and congressional Democrats have their way. That’s the real message of National Small Business Week.

Democrats are desperate to pass significant legislation before the midterm elections in November and seem to have landed on tax hikes on their policy craps table. Biden’s recently announced budget calls for $2.5 trillion worth of tax increases. His plans include raising rates by one-third on the more than 1 million small companies structured as corporations and significantly increasing the tax burden on successful small businesses set up as pass-throughs.

Unbelievably, congressional Democrats are pitching tax hikes as a cure for inflation. Last week, Senate Majority Leader Chuck Schumer (D-N.Y.) said, “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.” Democrats are taking a page from their failed Build Back Better playbook, which also tried to convince Americans that trillions of dollars in new spending is an inflation solution.

It’s unclear whether Democrats actually believe this economic sophistry. More likely, they are just pandering to Sen. Joe Manchin (D-W.Va.), whose vote they need to pass anything — and for whom inflation is a top priority. What’s clear is that they are attempting to distract from the true inflation culprit: their own bad policies, including reckless spending that has devalued the dollar, and generous social programs that goosed demand and depressed labor supply.

In reality, tax hikes would only accelerate inflation and contract the economy further by hamstringing small businesses. Higher taxes disincentivize small business creation and expansion needed to overcome supply constraints, reduce inflation, and accelerate economic growth. Tax increases would usher in stagflation and an economic recession.

To emerge from this economic contraction and ward off stagflation, Congress should take the opposite approach and make permanent the Tax Cuts and Jobs Act (TCJA), which led to historic shared economic prosperity in 2018 and 2019. TCJA provisions — including a 20 percent qualified business income deduction that approximately 15 million small businesses have taken advantage of each year — have allowed small businesses to keep more of their earnings and reinvest them into expansion, hiring, and wage increases.

Unfortunately, most TCJA provisions are scheduled to expire after 2025. Making them permanent can give small businesses the certainty they need to make investments to bring the economy back.

Republican members of Congress also should begin thinking now about how they can pass pro-small business reforms, given the potential for the GOP to retake control of the House and Senate. In addition to making the Tax Cuts and Jobs Act permanent, agenda items should include increasing traditional energy production and transportation to bring down gas prices; deregulation, especially 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 reduce prices.

A future with policies such as these can give small businesses something to look forward to this week and in the economically precarious months ahead.

Alfredo Ortiz is president and CEO of Job Creators Network.