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89–676 2014

THE DECLINE IN BUSINESS FORMATION: 

IMPLICATIONS FOR ENTREPRENEURSHIP AND 

THE ECONOMY 

HEARING 

BEFORE THE

SUBCOMMITTEE ON CONTRACTING AND 

WORKFORCE 

OF THE

COMMITTEE ON SMALL BUSINESS 

UNITED STATES 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED THIRTEENTH CONGRESS 

SECOND SESSION 

HEARING HELD 

SEPTEMBER 11, 2014 

Small Business Committee Document Number 113–082 

Available via the GPO Website: www.fdsys.gov 

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Congress.#13
(II) 

HOUSE COMMITTEE ON SMALL BUSINESS 

SAM GRAVES, Missouri, Chairman 

STEVE CHABOT, Ohio 

STEVE KING, Iowa 

MIKE COFFMAN, Colorado 

BLAINE LUETKEMEYER, Missouri 

MICK MULVANEY, South Carolina 

SCOTT TIPTON, Colorado 

JAIME HERRERA BEUTLER, Washington 

RICHARD HANNA, New York 

TIM HUELSKAMP, Kansas 

DAVID SCHWEIKERT, Arizona 

KERRY BENTIVOLIO, Michigan 

CHRIS COLLINS, New York 

TOM RICE, South Carolina 

NYDIA VELA ́ ZQUEZ, New York, Ranking Member 

KURT SCHRADER, Oregon 

YVETTE CLARKE, New York 

JUDY CHU, California 

JANICE HAHN, California 

DONALD PAYNE, JR., New Jersey 

GRACE MENG, New York 

BRAD SCHNEIDER, Illinois 

RON BARBER, Arizona 

ANN McLANE KUSTER, New Hampshire 

PATRICK MURPHY, Florida 

LORI SALLEY, Staff Director 

PAUL SASS Deputy Staff Director 

BARRY PINELES, Chief Counsel 

MICHAEL DAY, Minority Staff Director 

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(III) 

C O N T E N T S 

OPENING STATEMENTS 

Page 

Hon. Richard Hanna ................................................................................................ 1 

Hon. Grace Meng ..................................................................................................... 2 

WITNESSES 

Mr. Jonathan Ortmans, Senior Fellow, Kauffman Foundation, Washington, 

DC .......................................................................................................................... 3 

Mr. John Dearie, Executive Vice President, Financial Services Forum, Washington, DC ............................................................................................................. 5 

Mr. Chad Moutray, Chief Economist, National Association of Manufacturers, 

Washington, DC ................................................................................................... 7 

Dr. John Deskins, Director and Associate Professor, Bureau of Business and 

Economic Research, College of Business & Economics, West Virginia University, Morgantown, WV .................................................................................... 9 

APPENDIX 

Prepared Statements: 

Mr. Jonathan Ortmans, Senior Fellow, Kauffman Foundation, Washington, DC ..................................................................................................... 17 

Mr. John Dearie, Executive Vice President, Financial Services Forum, 

Washington, DC ............................................................................................ 22 

Mr. Chad Moutray, Chief Economist, National Association of Manufacturers, Washington, DC ..................................................................................... 102 

Dr. John Deskins, Director and Associate Professor, Bureau of Business 

and Economic Research, College of Business & Economics, West Virginia University, Morgantown, WV ............................................................. 109 

Questions for the Record: 

None. 

Answers for the Record: 

None. 

Additional Material for the Record: 

None. 

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SBREP-219 with DISTILLER

(1) 

THE DECLINE IN BUSINESS FORMATION: 

IMPLICATIONS FOR ENTREPRENEURSHIP 

AND THE ECONOMY 

THURSDAY, SEPTEMBER 11, 2013 

HOUSE OF REPRESENTATIVES, 

COMMITTEE ON SMALL BUSINESS, 

SUBCOMMITTEE ON CONTRACTING AND WORKFORCE, 

Washington, DC. 

The Subcommittee met, pursuant to call, at 10:00 a.m., in Room 

2360, Rayburn House Office Building. Hon. Richard Hanna [chairman of the subcommittee] presiding. 

Present: Representatives Hanna, Tipton, Chu, and Meng. 

Chairman HANNA. Good morning, everybody. Thank you for 

being here, and again, I apologize. In addition to that, there is a 

classified briefing at 11 o’clock, so we will do our best. Certainly, 

everyone here will get a chance to speak on this important issue. 

And I have read all your testimony. I prepared, but I will kind of 

work this through a little bit. So I appreciate your indulgence. 

According to economists, the Great Recession ended in 2009, yet 

five years later we are still struggling to see any signs of robust 

lasting economic growth in our economy. The nonpartisan Congressional Budget Office estimates a long-term average annual growth 

rate of 2.2 percent, a substantial decrease from the pace that existed between 1948 and 2007, which averaged 3.4 percent. We have 

all heard various reasons for the causes of the United States, lackluster rebound, excessive regulation, complex tax code, and a workforce shortage to name a few. We have also heard several solutions 

and frequently have looked for small businesses to lead the way to 

greater prosperity. Small firms are the catalyst for job creation, 

creating more than half of the net new jobs between 1993 and 

2013. Even more noteworthy are the contribution of new firms 

which offer the best opportunity for growth. However, as economists have examined America’s stagnant economy, a disturbing 

new trend has emerged. Fewer new businesses are being created 

each year than the year before. According to a recent report from 

the Federal Reserve Bank of Cleveland in 1978, Americans created 

12 new firms for every existing firm, but in 2011, this dropped to 

almost half, to 6.2 new firms per existing businesses. Even more 

starting, economic research suggests that while the Great Recession exacerbated this drop, the decline has actually been occurring 

for over 30 years. This downturn not only has a dramatic negative 

impact on our economy, but also signals that entrepreneurship may 

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2 

not be as strong and vibrant in America as it has historically been 

or certainly how we would like it to be. 

Today we are here to learn more about what this decline in new 

business creation means for the American economy and what we 

might do to reverse this trend. 

I would like to thank all of our witnesses for being here today, 

and I yield to Ranking Member Meng for her opening statement. 

Ms. MENG. Thank you, Mr. Chairman. Thank you to our witnesses for all being here today. 

In this Committee, we frequently talk about how small businesses are central to job creation. A more accurate assessment 

might be that new small businesses are vital to job growth. It is 

indisputable that small businesses are a big employer in the U.S. 

However, it is a subset of these companies that create the bulk of 

new jobs. Several analyses that while 90 percent of companies employ less than 19 workers, the strongest correlation to job creation 

is not size so much as age. Forty percent of small business job creation stems from new businesses, even though new firms represent 

only 10 percent of small firm employment. Likewise, older, more 

established forms account for two-thirds of small business employment, but they create less than one-third of new jobs. 

In short, as this Committee looks to accelerate economic growth 

and job creation, we would be wise to focus on newer firms that are 

seeking to grow quickly. Not only do these firms create employment 

opportunities, but they often innovate the new products and services that keep our economy competitive internationally. Given the 

outsized importance new enterprises play in job growth and competitiveness, it is disturbing to see long-term reductions in the rate 

of new business creation. Last year, we saw 38,000 fewer business 

owners per month than in 2012. This reduction remained constant 

throughout all demographic groups, from women to minorities, veterans and immigrants. There was a decided drop in new business 

formation. 

Certainly, some of this recent reduction can be attributed to job 

market improvements. When Americans are able to secure wellpaying jobs elsewhere, there is less incentive to pursue the relatively risky path of entrepreneurship. Nonetheless, we would be 

shortsighted to ignore longer term trends that suggest a reduction 

in new business formation. In the three decades between 1978 and 

2011, the percentage of firms less than one year old fell by half, 

suggesting that reductions in business creation are not a shortterm anomaly. If our nation is to remain an economic leader, we 

must maintain the entrepreneurial spirit that has long defined us. 

From a public policy perspective, this means pursuing a number of 

strategies that can help more Americans launch new enterprises. 

Access to capital is a perennial challenge for most startups. Traditional debt financing remains difficult for small firms to secure. 

I hope this Committee can work together to ensure government 

guaranteed loans backed by the SBA, including micro financing, 

are widely available. Likewise, equity financing must remain an 

option, whether it is through crowdfunding, private venture capital, 

or the Small Business Investment Company Program. 

Just as capital is critical for a new enterprise, so, too, is knowledge and know-how. In that regard, technical assistance and entreSBREP-219 with DISTILLER

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preneurial development programs can provide valuable help to 

fledgling businesses. It is incumbent on this Committee and all of 

Congress to provide adequate resources for SBA initiatives that 

provide this type of counseling. 

Mr. Chairman, one of the pillars of the American economy has 

always been a robust, thriving sense of entrepreneurship. As long 

as our nation continues creating new businesses, we can expect future job growth and greater economic opportunity for all Americans. In that regard, I look forward to hearing from our witnesses 

about the state of new business creation and what can be done to 

help more Americans launch their own enterprises. 

Thank you, and I yield back. 

Chairman HANNA. Thank you. If Committee Members have an 

opening statement prepared, I ask that they submit it for the 

record. You all have five minutes. Relax, we will be flexible about 

that. The yellow light means what every other yellow light in the 

world means. 

Our first witness today is Jonathan Ortmans, who serves as a 

senior fellow at the Kauffman Foundation. In his capacity, he advises the Foundation on global entrepreneurship and brings important research findings to the attention of policymakers. 

Mr. Ortmans, you may begin. And thank you. 

STATEMENTS OF JONATHAN ORTMANS, SENIOR FELLOW, 

KAUFFMAN FOUNDATION; JOHN DEARIE, EXECUTIVE VICE 

PRESIDENT, FINANCIAL SERVICES FORUM; CHAD MOUTRAY, 

CHIEF ECONOMIST, NATIONAL ASSOCIATION OF MANUFACTURERS; JOHN DESKINS, DIRECTOR AND ASSOCIATE PROFESSOR, BUREAU OF BUSINESS AND ECONOMIC RESEARCH, 

COLLEGE OF BUSINESS AND ECONOMICS, WEST VIRGINIA 

STATEMENT OF JONATHAN ORTMANS 

Mr. ORTMANS. Chairman Hanna and Ranking Member Meng, 

thank you so much. And Members of the Committee, thank you for 

this opportunity to testify about a troublesome trend in entrepreneurship, indeed the declining rate of new business creation. 

As the world’s largest private foundation focused on the study 

and promotion of entrepreneurship, the Ewing Mary Kauffman 

Foundation has been at the center of this issue for some time. Our 

financial commitments to data collection helped to uncover this 

trend, and our research has illuminated not only some possible explanations for the decline, but also ways in which public policy can 

create an environment more conducive to business formation and 

growth. 

New business creation is crucial to a healthy, vibrant economy 

for two primary reasons. Obviously job creation, but also innovation. Contrary to popular rhetoric, it is not small businesses but 

rather new and young businesses that drive new job creation. 

Nearly all net new jobs are created by new and young companies. 

Similarly, startups are responsible for a disproportionate share of 

innovative activity, which creates not just wealth for the entrepreneur, but I think more importantly, rising standards of living 

for all. 

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4 

These twin functions of entrepreneurship comprise the core of 

the United States’ economic preeminence. It is therefore why we 

should be concerned that we are witnesses this declining business 

creation rate, which threatens that position. In the late 1970s, 

about 15 percent of businesses were new. In 2011, that number 

hovered around 8 percent. And since 2000, even high growth entrepreneurship has been in decline, surprising us all, as epitomized by 

a slowdown in the technology industry. 

Although some of the declining share is natural as the economy 

ages, the trend has been accelerated by lower entry rates of new 

firms coupled with higher exit rates of young firms. This declining 

business dynamism has been taking place for decades across all 

sectors, raising serious concerns with regards to unemployment 

and lackluster wage growth. 

Despite this discouraging picture, there are reasons that we 

could be more optimistic. Although the best data on entrepreneurship is presently only available through 2011, early indicators point 

toward a full recovery of the business startup rate from the effects 

of the Great Recession. 

I should also note that it is only recent that in Washington, D.C., 

we have been articulating that it is going to require a different policy toolbox to deal with accelerating rates of new firm formation as 

opposed to the more generic broader question we faced in years 

past as to how do we support small businesses more broadly. 

And looking more long term, there are some other reasons for us 

to be optimistic. The demographic winds are changing. Over the 

next 20 years, we will have more people than ever in their 30s and 

40s. This is really important. The average age of U.S.-born tech entrepreneurs is 39 years old. The peak age for entrepreneurship and 

this new generation of new entrepreneurs will also have unprecedented numbers and types of education and training resources 

available to them, which should make for a stronger entrepreneurial ecosystem. 

We are also seeing an explosion of other kinds of programs and 

efforts, especially at the state and local level. There is an enormous 

amount of work going on to create more healthy entrepreneurial 

ecosystems that is relatively new and something that we cannot yet 

measure the effect and impact that they are having on the ability 

and the willingness of individual Americans to take a risk and form 

new firms. 

Finally, entrepreneurs of every stripe will have access to new 

forms of finance. As was mentioned in the opening statements, 

crowdfunding remains in its infancy, but several platforms have 

shown both strong growth and potential for the future. These developments hold promise in reversing the long-term decline of business creation, but the extent of their impact will depend upon good 

public policy. 

While more Americans will be entering the peak age for entrepreneurship, this same age group is increasingly burdened by student loan debt, which may discourage potential entrepreneurs from 

starting a business. Debt and delayed work opportunities must be 

addressed so that younger Americans are financially able to engage 

in entrepreneurship. 

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Other policy tools also exist. First among them, the creation of 

visa for immigrant entrepreneurs that allows foreign job creators 

to start and operate businesses in America. As we know, immigrants are more likely to found businesses than natives, and these 

businesses have generally more innovations than the average native-founded business. 

The creation of a startup visa would have an immediate impact 

on business creation and growth. 

Congress should also examine the role of regulatory accumulation and the role it may play in depressing entrepreneurial activity. 

We should be looking at new says of avoiding the, for example, superfluous licensing regulations that can unnecessarily reduce competition. The declining business creation rate is deserving of policymakers’ attention because of new and young firms disproportionate 

role in job creation and innovation. 

We, at the Kauffman Foundation, will continue to do our part in 

terms of exploring the reasons for this decline, and ways in which 

it might be mitigated and reversed. And, in fact, I am pleased to 

tell you that in early 2016, we plan to unveil a new entrepreneurial 

growth agenda which will identify ways the United States can attain a new faster growing and more broad-based entrepreneurial 

economy. 

While there are reasons to be optimistic about the future business creation, rates are unlikely to rebound without the support of 

good public policy, and therefore, I greatly appreciate the opportunity today to testify before you. Thank you. 

Chairman HANNA. Thank you, Mr. Ortmans. 

Our second witness today is John Dearie, who serves as Executive Vice President for Policy at the Financial Services Forum. 

Prior to joining the Forum in 2001, he spent nine years at the Federal Reserve Bank in New York. Recently, he coauthored a book, 

Where the Jobs Are, a book that examines the very issues we are 

talking about today. 

Thank you for being here, Mr. Dearie. You may begin. 

STATEMENT OF JOHN DEARIE 

Mr. DEARIE. Thank you, Mr. Chairman, and Ranking Member 

Meng. 

In the interest of our limited time, and because your opening 

statements and Mr. Ortmans’ statement I think makes clear that 

we all understand the nature of the problem, I am going to dispense with my written script and just tell you a bit in just a couple 

of minutes about the project that that was the basis of the book 

and that I think will be very helpful to you as you consider policy 

solutions to this very, very important problem. 

I should say that my background, as you just indicated, is in financial and economic policy. The importance of new businesses, 

both to job creation and as Mr. Ortmans made clear very importantly to innovation. And the reason why that is important is, of 

course, innovation drives productivity, which drives economic 

growth. 

So from the standpoint of both job creation and economic growth, 

new businesses are really where the action is and is why this hearing and your work is so important. 

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A colleague of mine and I at the Financial Services Forum 

learned about the importance of new businesses and the secular decline in new businesses and entrepreneurship in the spring of 2011, 

we were terribly concerned about this in the context and the weak 

recovery, and wanted to figure out why is this happening? The obvious question is why is this happening? 

After considering a number of investigative alternatives, we decided in the end that perhaps the best way to figure out what was 

going on with the nation’s entrepreneurs was to get out of Washington, D.C. and go talk to them. 

So with that in mind, we organized roundtables with entrepreneurs in 12 cities across the United States. We picked those cities very carefully, not only to cover the geographic expense of the 

country—obviously, you do not want to do all the roundtables east 

of the Mississippi—and also, to cover the industrial diversity of the 

economy. As you are aware, certain cities and regions tend to be 

associated with certain industry sectors, and so we picked our cities 

very carefully to get a really good cross section of both the geographic expanse of the country as well as the industrial diversity 

of the economy. 

As you can imagine, those roundtables were absolutely fascinating, and I would say that perhaps the most remarkable 

takeaway for us, and certainly from the standpoint of potential policy solutions for you all to consider—and we were quite surprised 

by this because it was our expectation that we would hear different 

things at the different roundtables. It is a very big country after 

all, a very industrially diverse economy. The startup scene in, say, 

Cambridge, Massachusetts is really different than the startup 

scene in Columbus, Ohio, or Orlando, Florida, or Seattle, all these 

other places we went, and yet, we realized that we were hearing, 

you know, with some differences in regional emphasis you might 

say, but we were hearing the same half dozen or so major themes 

everywhere we went in terms of what is in their way. And in their 

own words I will just run through these very quickly. We have the 

jobs, and we need to fill them in order to grow. We cannot find 

enough people that have the skills that we need. Our immigration 

policies are blocking our ability to attract and retain the world’s 

best talent and we need them. Access to capital for startups is even 

more difficult in the wake of a financial crisis. Overregulation is 

killing us. Tax complexity and uncertainty is diverting far too 

much attention away from our new businesses, and finally, and 

with apologies, there is far too much economic uncertainty and it 

is Washington’s fault. 

We recorded all of our conversations which gave us the opportunity to transcribe those discussions so we could go back and read 

them over and over again and really get to understand what the 

entrepreneurs were telling us and to pull out consistent themes. 

We subsequently, as I mentioned, wrote ‘‘Where the Jobs Are’’ and 

in that book we propose 30 specific policy proposals based on what 

the entrepreneurs told us they need, and they are all in my written 

testimony. I think what is of unique value to those proposals is because they are all based on what the entrepreneurs told us they 

need. In fact, many of them came right from the entrepreneurs 

themselves, who in the course of our roundtable said, you know, it 

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would be really great if the government would do X, and Courtney 

and I would look across the table at each other and nod and write 

it down. 

So I commend those proposals to you. I am happy to answer any 

questions about them or anything else that we did on our summer 

road trip. Thank you. 

Chairman HANNA. Thank you. So there is nothing new under 

the sun. Thank you. 

Our third witness today is Mr. Chad Moutray. Mr. Moutray is 

the chief economist for the National Association of Manufacturers. 

Previously, Mr. Moutray was the chief economist and director of 

economic research for the Office of Advocacy for the Small Business 

Administration from 2002 to 2010. 

Thank you very much for being here. You may begin. 

STATEMENT OF CHAD MOUTRAY 

Mr. MOUTRAY. Thank you, Chairman Hanna, Ranking Member 

Meng, and thank you for the opportunity to testify on the issue of 

business formation and policies that can help increase the overall 

economic activity. I will be taking these issues as you might imagine from a manufacturing perspective. 

The National Association of Manufacturers is the largest industrial trade association and voice for more than 12 million men and 

women who make things in America. The NAM is committed to 

achieving a policy agenda that helps manufacturers grow and create jobs. Manufacturers very much appreciate your interest in and 

supporting the manufacturing economy. 

Manufacturing activity has seen a resurgence since the end of 

the recession, and manufacturers mostly are upbeat about the coming months in the next few years. Yet, they are also frustrated with 

the overall slowness of the recent recovery, making business leaders more cautious in their assessments than they might otherwise 

be. A number of downsize risks, of course, exist in the coming 

months, including geopolitical events as you well know, the prospect of rising interest rates, and softness in several key export markets. At the same time, manufacturers of all sizes and in a wide 

swath of industries, have expressed concern about skills-gap shortages. 

The mostly positive outlook stands in contrast to the decline in 

business formation rates which is the basis of this hearing. The 

number of manufacturers has also fallen dramatically over the past 

decade from 354,498 establishments in 2000 to 295,643 establishments in 2011, the most recent year that there was data. The rate 

of manufacturing establishment startups has also declined according to the business employment dynamics data from the BLS, off 

from 2.25 percent of all establishments in 1995 to 1.45 percent in 

2013. In terms of raw numbers, there were roughly 8,000 manufacturing startups per quarter in 1995, with around 5,000 per quarter 

in 2011–2013 timeframe. It is also clear that closures have exceeded startups in the sector in since at least 1999. At least part of this 

trend could be explained by the tremendous consolidation that has 

taken place in the manufacturing sector, yet the trend rate for 

manufacturers is significant, mostly because it mirrors other data 

as much as you have heard already. 

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In addition, a number of factors might help explain the reduced 

business formation rates. First and foremost, economic growth has 

been much slower more recently. Real GDP growth averaged 3.8 

percent in the 1990s. While the sector experienced modest growth 

after the 2001 recession, the economy grew by an average of 2.7 

percent between 2002 and 2007. Since the Great Recession of 2007 

and 2009, real GDP growth has averaged just 2.2 percent as you 

just mentioned. 

Indeed, the consensus forecast for 2015 is for roughly 3 percent 

growth, but if that is true, it would be the first year since 2005 

that we would have had a three in front of our GDP growth figures. 

This more sluggish economic activity likely serves as a disincentive for new business creation or for existing firms potentially dissuading investments and new capital spending or in hiring. Along 

those lines, nonresidential fixed investment also has increased at 

a much slower pace, down from an average of 8.6 percent in the 

1990s to a 5.4 percent and 5.1 percent respectively in the 2003– 

2007, and 2010–2013 timeframes. Employment growth has also decelerated. 

One must look at a number of business environment conditions 

really as a possible source that also might discourage business formation. Indeed, economic and political uncertainty, the need for 

comprehensive tax return, rising health insurance costs and rising 

regulatory burdens have often been cited as possible factors for explaining reduced business activity, and we can spend a lot of time 

talking about each one of those elements but I am going to talk 

about regulations. 

Yesterday, the NAM released a study on total federal regulatory 

compliance costs by Mark Crain and Nicole Crain. This analysis 

update of the author’s prior work for the Office of Advocacy at the 

SBA where I used to be the chief economist as you mentioned. This 

report found that businesses spent $2.028 trillion to comply with 

federal regulations in 2012. More recently, compliance costs for 

businesses in the United States averaged $9,991 per employee in 

2012, with manufacturers incurring a per employee cost of nearly 

double that amount, $19,564 per employee. Small manufacturers 

with less than 50 employees spent a whopping $34,671 per employee, illustrating the massive burden that we are placing on 

many of these small businesses and manufacturers. 

Manufacturers believe that regulation is critical to the protection 

of worker safety, public health, and our environment. At the same 

time, our regulatory system is in need of improvement. We need 

smarter regulations that minimize unnecessary burdens and better 

balance benefits and costs, eliminating redundancies wherever possible. Regulations are allowed to accumulate with no real effort to 

evaluate or clean up the outdated or obsolete rules already on the 

books. It is imperative that policymakers and regulators understand the cumulative burdens that these rules are placing on businesses and enact policies that minimize those costs that do not contribute to the realization of regulatory objectives. 

The Crane and Crane report also illustrates how regulatory relief 

can be an economic development issue. In a survey conducted by 

these authors, 85 percent of manufacturers responded that they 

would invest more in the business, both in their workers and in 

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capital equipment, if their compliance costs could be lessened even 

a little. These business leaders hope that policymakers look at the 

larger regulatory landscape before imposing new burdens that will 

stifle growth and dissuade investments. 

In conclusion, Chairman Hanna, Ranking Member Meng, and 

other members of the Subcommittee, thank you for your leadership 

on this issue and for holding this hearing. Falling business formation rates are a challenge and one that is worthy of your attention. 

Chairman HANNA. Thank you. 

I yield to Ranking Member Meng to introduce our next witness. 

Ms. MENG. Thank you, Mr. Chairman. 

Dr. John Deskins is the director of the Bureau of Business and 

Economic Research and associate professor of Economics at West 

Virginia University. His recent research has focused on small business growth, U.S. state economic development efforts, and government tax and expenditure policy. His work has appeared in journals, including Small Business Economics, Public Finance Review, 

and Economic Development Quarterly, amongst others. He holds a 

Ph.D. in Economics from the University of Tennessee. 

Thanks for being here. 

STATEMENT OF JOHN DESKINS 

Mr. DESKINS. Chairman Hanna, Ranking Member Meng, and 

Members of the Committee, thank you so much for inviting me 

today to discuss the very important role that small businesses play 

in our economy. 

Numerous statistics from the Small Business Administration and 

other sources suggest that small businesses do, indeed, play a vital 

role in our economy. For instance, as we know already, statistics 

based on standard SBA definitions indicate that small firms represent the large majority of firms in the nation. Small firms employ 

around half the total U.S. private sector workforce and small firms 

have historically accounted for more than half of the net job creation in the U.S. Furthermore, economic 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 good economic, but is indeed a key driver of economic 

growth. 

My own co-authored research has found that small business establishment berths are the single largest determinant of output in 

employment growth at the U.S. state level. This suggests that fostering an environment that is fertile for small business formation 

and growth is likely to be more fruitful than many of the simpler 

policy levers that officials often look toward. Research has found 

that new firms are more likely to promote economic growth as a 

result of innovation compared to existing firms, and research has 

also shown that new firms often increase competitive pressure on 

existing firms, forcing those existing firms to be more competitive, 

thereby creating a broader economic benefit for society. 

As the term small business and entrepreneurship are somewhat 

vague notions, research has also refined our understanding of the 

specific types of small businesses that are most effective in promoting economic growth. Here, as has been mentioned before, the 

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key finding is that new firms are most important to economic prosperity, not necessarily small firms. However, new business formation rates in the U.S. have suffered during recent years, and it 

stands to reason that this decline is a significant concern as it relates to innovation and long-run economic growth. It is imperative 

that public policy is structured to be conducive to small business 

formation to help ensure that our economy remains healthy and innovative in the long run. 

Fortunately, a large literature has developed that examines the 

ways in which public policy affects small business activity. This research has investigated the question using a variety of data—survey data, tax return data, aggregated data—and at multiple levels—national, state, and local. The literature has investigated a variety of tax and expenditure policies, such as various income tax 

rate measures and tax credits, as well as nonrate policies, such as 

depreciation policy and the deductibility of health insurance premiums. 

Some important findings from this literature are as follows. Federal income tax rates and credits do matter. Research has convincingly shown that a relatively more favorable tax policy towards the 

self-employed compared to wage and salary workers does increase 

self-employment. A sample of findings in this area is as follows. A 

lower average tax rate for self-employment income relative to that 

of wage and salary income has been shown to encourage the transition to self-employment. Higher expected marginal income tax 

rates faced by the self-employed have been shown to shorten spells 

of self-employment, and correspondingly, increases in the expected 

marginal income tax rate for wage and salary income relatively 

speaking increases length of self-employment. Further, spending on 

research and development is positively influenced by tax credits towards small business. 

Other tax policies, aside from rates, 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 does reduce exit from self-employment. However, it is important to remember that tax avoidance and tax evasion are often 

more pronounced for the self-employed. Research has shown that 

evasion and avoidance are likely to be one of the drivers behind the 

transitions into self-employment. Indeed, entry into self-employment may actually be high when marginal rates in general are 

high, driven by the potential to evade or avoid taxes, and all together this implies that the policymakers should be mindful of the 

potential for inefficient tax avoidance or illegal tax evasion when 

crafting policy towards small business. 

Policymakers must also be mindful, however, that some of the 

identified behavioral effects that I mentioned before, while they are 

readily apparent, they are oftentimes small in magnitude. In contrast of these findings, some research has failed to identify any relationship between other elements of public policy and small business activity. For example, recent research has failed to identify 

that more favorable depreciation rules towards small business has 

been effective in promoting small business activity. 

Thank you again for the invitation. I look forward to your comments. 

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Chairman HANNA. Thank you very much. 

Mr. Dearie, I want to ask anybody here actually, one of the 

things we talk about a lot is the skills gap, which for me directly 

relates to our immigration policy and our lack of dealing with it directly, particularly with highly skilled individuals who have other 

options now. At one time their options were much more limited. 

They can go back to a number of places that welcomed them more 

clearly and more easily than we do. And I want to talk to you 

about risk, but visas for the highly skilled, anybody here can confirm or deny or push back in any way you like, but I would like 

to hear your opinion. 

Mr. DEARIE. A couple of quick comments. First of all, very 

quickly on your comment about there is nothing new under the sun 

yet, I take your point well that none of the things that we heard 

from entrepreneurs around the country are terribly shocking in 

terms of the problems, but the fact that we heard it everywhere we 

went at individual, unrelated roundtables I think underscores that 

these really are the problems. And one of them is the one that you 

speak to in terms of the skills gap and its relationship to our policies with regard to immigration. I know that there is a lot of debate about the skills gap. I have talked with folks here in Washington who absolutely deny it because they say that if there were 

a skills gap you would see it showing up in wage data and it is not 

showing up in wage data. I think there are reasons, or at least 

some reasons why it is not showing up. One is, and we heard this 

at roundtables all across the country, so many of the skills these 

days that the small businesses and entrepreneurs need are highly 

commoditized or they are commoditizable. It is very easy to 

outsource, for example, coding assignments. And when entrepreneurs cannot find local talent, it is very easy to outsource that 

work somewhere else. And so therefore, there is not upper pressure 

on wages. 

With regard to the importance of more foreign-born talent, our 

recommendation in the book is to eliminate the cap on H-1B visas. 

Keep the criteria. The criteria are very, very important, but as you 

know, Mr. Chairman, we have about 85,000 H-1Bs this year. All 

of the openings for H-1B visas were taken up within five days of 

them becoming available this year. It is clear that we need many, 

many more, and the problem is that when you limit something, you 

make the price higher, and too often, startups that have the least 

amount of cash and resources to get foreign-born talent by way of 

H-1B visas are shut out of the process. 

Chairman HANNA. Well, thank you. We have—go ahead, Mr. 

Ortmans, I am sorry. 

Mr. ORTMANS. Well, I just have a couple of very quick comments. I think the most important thing we have got to remember 

is that new firms are not necessarily founded by individuals. They 

are founded by teams. So we are not, you know, this is not an idea 

that you let all these foreigners into the country who, you know, 

it is all people from outside the United States. So they bring talent 

to a founding team, which I think is really important for us to remember. And we obviously did a study at the Kauffman Foundation that showed that actually this is such a small number of people we are talking about giving some kind of startup visa to, the 

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they are obviously not job creators, and this is really hard for, I 

think, the average citizen to understand. I mean, our study showed 

that after 10 years, certainly one of the proposals for a startup visa 

would create 1.6 million jobs. So I do not think there is any evidence to show there is any kind of crowding out hypothesis as far 

as the declining rates. 

Chairman HANNA. In the interest of time I am going to turn to 

Ranking Member Meng. 

Ms. MENG. Thank you. 

I am curious that it is often talked about that students graduating with relevant majors are not graduating with the skills that 

employers are seeking. Are there efforts that entrepreneurs or associations representing these small businesses are making to communicate with colleges and universities on what the industry needs 

are and how academic institutions can change their curriculums to 

address the skills gap? 

Mr. MOUTRAY. So, yes. Certainly from the manufacturing perspective, this is something we hear almost universally across all 

sectors. We actually have a workforce taskforce that is meeting 

right now led by many of our CEOs from our member companies. 

It is something that our manufacturing institute is very devoted to, 

and I think that one of the things that we are trying to do is to 

get our manufactures to meet with educational institutions and 

their state and local economic development entities to try to 

proactively come up with curricula that will meet the needs of 

manufacturers. 

I was just at a manufacturer down in Virginia Beach about a 

month ago, and because of the lack of workers in their area, they 

actually have a high school camp where they invite in high 

schoolers to come in, and that is really one of the sources that they 

have for new talent. But it shows you the extent to which many 

manufacturers have had to become proactive because they are not 

seeing the educational institutions meet those needs. But we are 

seeing shortages in welders, mechanics, engineers, et cetera across 

the board. 

Mr. DEARIE. And if I could just add very quickly a very important point that I think you will take a lot of interest to underscore 

what Chad just said, the manufacturing and business community 

is very eager to have input into curricula and to be involved in 

solving this problem. Where the resistance is is in the education establishment, so I think that is a very, very important point, and 

pressure has to be put where it appropriately is put in order to get 

that increased cooperation between the business community manufacturing and our education establishments. 

Mr. DESKINS. Being from a university, could I comment on that 

as well briefly? 

We understand that universities, we are oftentimes slow to move 

to respond to the needs of the new economy, but I think some universities are moving, albeit slowly, to make sure that our curricula 

are better suited to the needs. I would point towards internships. 

Colleges and universities need to do a lot more to promote internships for students to ensure that they have at least one internship 

before they graduate so they have that real-world experience in addition to the college classroom, and also experiential learning proSBREP-219 with DISTILLER

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grams. A lot of times we have programs that are moving more towards projects that students work on that are in conjunction with 

the local business community. So I think businesses, colleges, are 

doing better, but they can do even more to promote experiential 

learning and internships because those are crucial to making sure 

that the skills that we teach are the right skills. 

Ms. MENG. And student loan debt actually is a growing problem 

in the United States. How big of a deterrent do you believe that 

this burden is to entrepreneurship and any possible solutions, like 

loan forgiveness programs? Anyone can answer. 

Mr. DEARIE. We heard about this problem at virtually every 

roundtable that we conducted. And the way that it impacts entrepreneurs is that kids who are graduating from school who might 

be highly inclined to join a startup and are very, very talented and 

those startups desperately need, cannot afford to because they are 

carrying a huge student debt that they have to pay off, and so they 

go to an established company instead. 

We offer a couple of ideas for dealing with this, particularly in 

the context of trying to focus on our increasing need for STEM 

graduates, and one of the ideas is to think about a federal tax credit that if you are a graduate, you graduated with an undergraduate 

or graduate degree in STEM, that you get a federal tax credit, that 

that can be applied in increments over the course of five years to 

reducing your taxable income to make it easier to deal with your 

student debt. 

Ms. MENG. Thank you, and I yield back. 

Chairman HANNA. Thank you. 

Mr. Tipton? 

Mr. TIPTON. Thank you, Mr. Chairman. And thank the panel 

for taking the time to be here. 

Mr. Dearie, I probably could have saved you a lot of money in 

terms of your research going out. I went out to our district, a lot 

of rural communities, small businesses that are out there. We 

heard the exact same stories during this month of August, frankly, 

over the last two years as we traveled through the district, and 

real frustration from our small business community in terms of opportunities to be able to create jobs and new startups as well just 

with the challenges that we face. I certainly took no offense, and 

I do not think anyone here probably did when you were talking 

about uncertainty coming out of Washington and trying to be able 

to actually address that overregulation. 

Do you have some suggestions in terms of we have actually 

passed a bill with some bipartisan support out of the House of Representatives called the REINS Act, to be able to put Congress back 

into those regulatory authorities because I am a small businessman. Incredibly frustrating when we have to be able to have the 

proverbial act of Congress vote through the House or vote through 

the Senate a presidential signature to be able to resend something 

that we never voted on. And we all know that we need rules and 

regulations. Do you have some thoughts on being able to simplify 

that? You know, we have had 174,000 new pages added, 4,000 new 

regs are in the pipeline. I think Mr. Moutray noted we have got 

over $2 trillion regulatory costs, and that is just the federal end of 

the world. There are state costs, county costs, city costs that are 

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literally crippling our ability to get this economy moving considering we have got the lowest labor participation rate in the last 36 

years. 

Mr. DEARIE. That is quite right. And the study that Chad’s 

group put out yesterday is only the most recent confirmation that 

we have a problem. The government is very, very good by its nature at putting out regulations. It is not very good on a regular 

basis going back, streamlining existing regulations, getting rid of 

regulations that are no longer appropriate, et cetera. 

I think in addition to the REINS Act, I will call your attention 

to a piece of legislation—and forgive me, I do not remember all the 

details. I will get it to you, but I believe it is called the Regulatory 

Improvement Act. I know that Congressman Mulvaney was a cosponsor. I cannot remember the other cosponsor, but I will get it 

to you. It is based on an idea that came out of all places—and I 

say that with great respect, but it just is not the kind of place you 

tend to associate with an effort to reduce regulation. The Progressive Policy Institute, and specifically Mike Mandel, an economist 

there who has spent a lot of time thinking about the impact on 

businesses of just the buildup over time of regulation. Even if every 

single one of the regulations passed was appropriate and needed, 

the sheer buildup over time, he likens it to pebbles in a stream or 

barnacles on the bottom of the boat. It erodes the productive capacity of the economy, and he suggested a mechanism based on the 

BRAC Commission, the Base Closing and, you know, whatever the 

words are, that that model would prove to be very, very effective 

in terms of eliminating excess capacity in our military base system, 

and he applies the same idea, the same principles to a regular committee, you know, sort of a Blue Ribbon panel of experts that would 

take on a specific aspect of our regulatory code on a regular basis, 

a scoop of the pebbles as he calls it, conduct public hearings of 

stakeholders, et cetera, et cetera, and then make recommendations 

in terms of streamlining, elimination, combining, et cetera, that 

would be submitted to Congress for an up or down vote. And he 

believes that that would be very effective. I think it would be very 

effective. It is a wildly intriguing idea. It has been submitted. That 

bill has been dropped. And as I said, I will get the details to you 

because I think it holds great potential. 

Chairman HANNA. Great. And I appreciate that. As a small 

business guy, I had a pretty simple principle I tried to live by. You 

know, if it does not work, stop doing it. If it is broken, fix it. If it 

is in the way, get it out of the way in to be able to get the economy 

moving. 

Mr. Deskins, you are an economist, and one of the deep concerns 

that I certainly have in my district is we have some of the lower 

per capital incomes, save Aspen and a couple of our resort areas 

in my district. When we are talking about these $2 trillion in regulatory costs, businesses pass those costs on, do they not? 

Mr. DESKINS. Of course. Those costs have to flow through. I 

mean, businesses do not pay taxes; people pay taxes as the famous 

saying goes. So either the consumers are going to pay, the owners 

are going to pay, or the employees are going to pay fundamentally. 

I agree with what Mr. Dearie said a second ago, that regulatory 

policy is complex, and I would add my piece of that is tax policy 

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is complex, and I think we would find that, you know, especially 

given the issue that I discussed with evasion and avoidance with 

small businesses when there is a lack of third-party reporting, I 

think if we could simplify the tax system, if we could, just from a 

very broad perspective, simplify the tax system as well as the regulatory system, if we could just reduce the number of exemptions, 

deductions, and credits that have crept into the system over the 

last few decades, I think it would help in terms of compliance burden. It would help in terms of the opportunities for evasion and 

avoidance, and it would also help in terms of overall efficiency if 

we could combine a broadening of the tax base with lower rates as 

well. I could not agree more. 

Mr. TIPTON. And if I may, Mr. Chairman, just a little bit of a 

follow-up to that because this seems to me to be a double-edge 

sword. In your testimony, and I noted your comment that taxes do 

matter, but we are talking about the tax code. When we start talking about $2 trillion in regulatory costs, we are virtually having 

taxation via regulation. This is impacting moms and dads that are 

trying to be able to buy clothes for their kids to be able to go back 

to school. It is showing up in higher prices in terms of the marketplace and stifling innovation. Is that accurate? 

Mr. DESKINS. I think it is accurate. I think that we have a lot 

of room for improving the overall system. Just over time, as Mr. 

Dearie said, we are good at adding new regulations to target specific issues that pop up, but after regulations accumulate over decades, it is really hard to look back and to streamline the broader 

system as far as regulatory policy goes or as far as tax policy goes. 

So I am always advocating for a simpler, more streamlined system 

that has broader bases and lower rates. 

Mr. TIPTON. Thank you. I am out of time. I yield back, Mr. 

Chairman. 

Chairman HANNA. Thank you very much. 

Thank you, everyone, for being here. I think what we have seen 

here is a long statement of something that is very seldom correct, 

and that is that the commonly accepted wisdom is actually correct 

here; that regulation, the skills gap, over burden, an accumulated 

list of rules and regulations that actually kills the very thing that 

it is trying to protect; that in an effort to have some control over 

every outcome, we actually ruin every outcome in some small way. 

I do believe that people should be able to capitalize their education in STEM; that is if businesses can do that with their biggest 

capital investment, why should not individuals? So I appreciate 

that comment and I personally support that. 

College debt. It is interesting because if you have $100,000 in 

debt, it is scary to try to open a business on top of that. So I think 

that is worth looking at, and I appreciate everybody’s comments 

today. 

Boy, I wish we had more time. We have a hearing, or rather a 

closed hearing with all the members of Congress at 11 o’clock. If 

there are no further comments, I want to thank everybody again. 

I ask unanimous consent that members have five business days to 

submit statements and supporting materials. Without objection, so 

ordered. 

Thank you all again. 

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[Whereupon, at 10:56 a.m., the Subcommittee was adjourned.] 

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1 United States Small Business Administration, Office of Advocacy. ‘‘Frequently Asked Questions.’’ 2014. 2See Acs, Zoltan, and Catherine Armington, ‘‘Employment Growth and Entrepreneurial Activity in Cities.’’ Regional Studies, 38(8), 2004. 3 Bruce, Donald, John A. Deskins, Brian C. Hill, and Jonathan C. Rork. ‘‘(Small) Business Activity and State Economic Growth: Does Size Matter?’’ Regional Studies, 43(2). 4Disney, R., J. Haskel, and Y. Heden. ‘‘Restructuring and productivity growth in UK manufacturing.’’ Economic Journal, 113, 2003. 

Testimony before the Committee on Small Business, Subcommittee 

on Contracting and Workforce 

Hearing Title: 

‘‘The Decline in Business Formation: Implications for 

Entrepreneurship and the Economy’’ 

John Deskins, Ph.D. 

September 11, 2014 

Mr. Chairman and Members of the Committee, I am John 

Deskins, and I serve as Director of the Bureau of Business & Economic Research and as Associate Professor of Economics at West 

Virginia University. Thank you for inviting me to appear before 

you today to discuss the role of small business in the United States 

economy. 

Numerous statistics from the U.S. Small Business Administration and other sources suggest that small businesses play a vital 

role in our economy. For instance, statistics based on standard SBA 

definitions indicate t hat 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 accounted for more than half of net job creation in the U.S.1

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.2

My own co-authored research has found that small business establishment births are the single largest determinant of output and 

employment growth at the US state level.3 This research suggests 

that fostering an environment that is fertile for small business formation and growth is likely to be more fruitful than manipulating 

many of the simpler policy levers that officials often look toward. 

Research has found that new firms are more likely to promote 

economic growth as a result of innovation, compared to existing 

firms. Research has also shown that new firms often increase competitive pressures for existing firms, forcing existing firms to be 

more competitive, thereby creating a broader economic benefit for 

society.4

As the terms ‘‘small business’’ and ‘‘entrepreneurship’’ are somewhat vague notions, research has also refined our understanding of 

the specific types of small business that are most effective in proSBREP-219 with DISTILLER

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5See Haltiwanger, John C., Ron S. Jarmin, and Javier Miranda. ‘‘Who Creates Jobs? Small 

vs. Large vs. Young.’’ National Bureau of Economic Research, August 2010. 6 United States Small Business Administration, Office of Advocacy. ‘‘Frequently Asked Questions.’’ 2014. 7 Bruce, Donald. ‘‘Effects of the United States tax system on transitions into self-employment.’’ 

Labour Economics, 7, 2000: 545–574. 8Gurley-Calvez, Tami, and Donald Bruce. ‘‘Do Tax Cuts Promote Entrepreneurial Longevity?’’ 

National Tax Journal, 61(2), 2008. 9See Gale, William, and Samuel Brown, ‘‘Small Business, Innovations, and Tax Policy: A Review,’’ Tax Policy Center, April, 2013, for a discussion of this issue. 

moting economic growth. Here a key finding is that young firms are 

most important for long-run economic prosperity, not necessarily 

small firms.5

However, new business formation rates in the U.S. have suffered 

during recent years 6 and it stands to reason that this decline is a 

significant concern as it relates to innovation and long-run economic growth. 

It is imperative that public policy is structured to be conducive 

to small business formation to help ensure that our economy remains innovative and as healthy as possible in the long-run. 

Fortunately a large literature has developed that examines the 

ways in which public policy affects small business activity. I will 

use the remainder of my remarks to comment on the findings of 

this literature. 

This research has investigated the question using a variety of 

data—survey data, tax return data, and aggregated data—and at 

multiple levels—national, state, local. The literature has investigated a variety of tax and expenditure policies, such as various 

income tax rate measures and tax credits, as well as non-rate policies, such as depreciation policy or health insurance deductibility. 

Some important findings from the more recent literature relating 

to how public policy affects small business are as follows: 

• 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. A sample of findings is as 

follows: 

Æ A lower average tax rate for self-employment income, 

relative to that of wage and salary income, has been shown 

to encourage the transition to self-employment.7

Æ Higher expected marginal income tax rates faced by 

the self-employed have been shown to shorten spells of 

self-employment. Correspondingly, increases in expected 

marginal income tax rates for wage and salary income 

lengthen spells of self-employment.8

Æ Spending on research and development is positively 

influenced by tax credits toward small business.9

• Other tax policies are also found to matter in recent research. For instance, research has shown that greater deductSBREP-219 with DISTILLER

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10Gurley, Calvez, Tami. ‘‘Tax-Based Health Insurance Reforms.’’ Contemporary Economic Policy, 29(3), 2011. 11See Bruce, Donald. ‘‘Effects of the United States tax system on transitions into self-employment.’’ Labour Economics, 7, 2000: 545–574, for suggestive evidence to this effect. 12 Bruce, Donald, John Deskins, and Tami Gurley-Calvez. ‘‘Depreciation Rules and Small Business Longevity.’’ Journal of Entrepreneurship and Public Policy, 3(1), 2014. 13 Bruce, Donald, and John Deskins. ‘‘Can state tax policies be used to promote entrepreneurial activity?’’ Small Business Economics, 38(4), 2012. 

ibility of health insurance premiums for federal income tax 

purposes likely reduces exits from self-employment.10

• It is believed that tax avoidance and evasion opportunities 

are often more pronounced for the self-employed. Research has 

shown that evasion and avoidance are likely drivers of the 

transition into self-employment. Indeed, entry into self-employment may actually be high when marginal rates in general are 

high, driven by the potential to evade or avoid taxes.11 Overall 

this implies that policymakers should be mindful of the potential for inefficient tax avoidance activities and illegal tax evasion when crafting tax policy toward small business. 

• Policymakers must also be mindful, however, that some of 

the identified behavioral effects, while readily apparent, are 

considered small in magnitude. 

• In contrast to these findings, some research has failed to 

identify any relationship between other elements of policy. For 

instance, recent research has failed to identify any evidence 

that more favorable depreciation rules and capital expensing 

policies promote small business activity.12

• Several elements of U.S. state tax policy have also been 

identified to affect small business activity in states.13 Although 

magnitudes here are often small as well. 

There are many important questions that remain in the literature. Even the most basic question of what is a ‘‘small business’’ 

is not met with universal agreement. 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. 

Æ 

SBREP-219 with DISTILLER