As Tax Day approaches, I want to reflect on the effects last year's tax code overhaul is having on small business priorities, spending, and optimism. Importantly, this is not a discussion of the law's long-term economic effects, but rather the reactions of people who are going to be impacted by the law.
Leading up to 2018, for more than a decade a majority of American small business owners had felt that taxes and regulations were among the major obstacles to their success, as evidenced by surveys conducted periodically by the NFIB Research Foundation, which has collected data on businesses since the 1970s.
But this year, on the list of business problems, taxes ranked last. This is pretty significant when you consider that, in the two previous years, legal issues of tax and regulation were considered primary barriers to success that kept businesses from reaching their income-earning potential. It is difficult not to draw a direct link between business owners' opinions and their perception that tax reform would help them.
The 2018 survey also found that business owners have been more optimistic about the economy than any other year since 1983, when the U.S. was recovering from back-to-back years of recession. This is consistent with conversations I have had with business owners in Washington, D.C. and Maryland, most of whom feel the taxes they pay under the new laws are fairer than before the legislative reform.
The NFIB survey's findings are similar to those of other surveys conducted over the same general period of time by organizations such as PNC and the Chamber of Commerce. The data across all three surveys shows that while small business confidence has been on the rise for several months, it rose most dramatically after the tax breaks.
Taking a big picture view, American business owners in Q1 reached their second highest rates of optimism in 45 years and the highest in more than a quarter century. In 1984, the economy grew 6.8 percent, vindicating the expectations of business owners. The rise in optimism in 2018 has been accompanied by greater spending on business assets, increased compensation for employees, and increased hiring.
Several business owners I have spoken to in the Washington, D.C. and Maryland area plan to expand and are hiring new employees. They have credited this positive outcome directly to lower taxes, fewer regulations, and the promise of further improvements to the legal system at the federal level.
That is not to say the tax code could not be made friendlier for entrepreneurs, particularly those who do not have a lot of startup capital. But recent reforms have mitigated the burdens of taxation and regulation enough that most business owners are relatively pleased. Despite an initial wave of skepticism about the practical effects of the tax breaks for regular people, a large percentage of business owners find the new laws helpful.