Will Government Crush Economic Recovery?
Written by Doug and Polly White
It’s undeniable that small business is the growth engine of the economy. The Small Business Administration reports that there are 22.9 million small businesses in the United States. The Bureau of Labor Statistics (BLS) states that 90 percent of all net job creation from 1996-2007 came from small businesses. There is little question that if the US is to recover from this recession and if unemployment is to be driven down, small business will lead the way. Unfortunately, intentionally or unintentionally, the government is crushing our one hope of recovery.
A local bank was very successful. Through hard work and excellent customer service, they had grown their assets exponentially. In the process they had created wonderful jobs and hired many people. It was a great example of small business fueling the growth of the American economy.
As the number of employees grew the diligent head of human resources approached the president and said, “You know, when we hit 50 employees; we’ll be subject to FMLA” (the Family Medical Leave Act). After gaining a thorough understanding of the complexity of complying with the Act, the President made a conscious decision to stop the growth of his bank. Job creation came to a screeching halt. The president wasn’t opposed to extending the benefits of FMLA to his employees. Rather, he made an informed decision to avoid the considerable cost associated with the complexity of maintaining records and making judgments about what qualified for FMLA and what did not ―so much for small businesses fueling the growth of the economy.
Large Fortune 500 companies may be able to afford the cost of regulation because they can amortize it over tens of thousands of employees and over billions of dollars of revenue. Unfortunately, small businesses don’t have that luxury. Further, a company doesn’t have to reach the 50 employee mark to be subject to significant regulatory requirements. In fact, in the Commonwealth of Virginia (a relatively business friendly state), we count dozens of different state and federal regulations with which a business must comply when it hires its first employee. They include things such as the Immigration Reform and Control Act, the Consumer Credit Protection Act, the Fair Labor Standards Act, the Occupational Safety and Health Act, and the list goes on and on. It’s enough to make an entrepreneur's head explode. The load is staggering.
Historically, most small business owners have survived by simply choosing to remain ignorant with regard to the regulations. They simply could not afford the time, effort, and money that it would take to be knowledgeable of and compliant with all of these regulations. For the most part they have successfully flown under the radar. It was the only way they could survive. For example, we helped a successful entrepreneur who had been an employer for 15 years hire an inside salesperson. After the offer was accepted, we told him that the new employee would come in on Friday to complete her Form I-9 (required by the Immigration Reform and Control Act). The business owner responded, “I-what? We don’t do any of that,” and obviously they hadn’t for many years.
However, the days where ignorance of regulations is bliss are ending. The current administration seems to view fines resulting from enforcement of regulations as a source of revenue to fund its large spending initiatives. Significant increases in funding enforcement are rampant. For example, the Department of Labor’s (DOL’s) 2011 budget includes a $25 million initiative to strengthen enforcement of employees misclassified as contractors. The budget also includes an 11 percent increase in funding for the Department of Justice Civil Rights Division and a 5 percent increase in funding for the Equal Employment Opportunity Commission.
Other groups are stepping forward in collaboration with the government to ensure that even the smallest of entrepreneurial enterprises are compliant with every jot and tittle of the regulations. For example, in the Richmond, Virginia area a local law firm named Marks & Harrison has been running commercials inviting people who think that they should have received overtime pay to call for a free consultation. Other firms are running ads like these in essentially every significant market across the country.
On the surface this doesn’t sound too bad. Employees should get the pay to which they are entitled, right? Well yes, but unfortunately the regulations simply are not clear. There is a lot of grey area. The result is that many small business owners will have to hire expensive attorneys they cannot afford to fight charges of improper employee classification. To make matters worse, DOL has recently come to the aid of the Marks & Harrisons of the world by releasing a smart phone timekeeping app that will allow employees to track the hours they work so that employers can be nailed for any perceived irregularity. We can all agree that employees should be paid fairly, but when complex and confusing regulations can be viewed quite differently by two reasonable people, it’s the attorneys who win and job creation that suffers.
There’s no end in sight and it looks like the burden will increase further. In fact, the new regulations that will be established if Obama Care is fully enacted are yet to be completely understood. The one thing on which almost every interested observer can agree is that new regulations will increase the staggering burden on small businesses ―our one hope for recovery.
Doug and Polly White are partners at Whitestone Partners, Inc., a management consulting firm guiding small and midsize businesses through profitable growth. Combined, they have more than 50 years of experience enabling companies to achieve their goals.
Polly served as the head of HR at several midsize companies. Her expertise is in people management and human systems. Polly received her BA in Business from Averett University and her MA in Adult Education and Human Development from The George Washington University.
Doug began his career with McKinsey & Company. He then worked as the CEO or COO for a number of small and midsize businesses. His areas of focus are strategy, operations and finance. Doug received a BS in Physics from Randolph-Macon College. He earned a BS and an MS in Mechanical Engineering at Georgia Tech and received an MBA with distinction from Harvard Business School.
Six issues at the top of tax and finance leaders’ agenda
New Deloitte research reveals that tax leaders are under increasing pressure to add strategic value as companies accelerate business model transformation, from undergoing digital transformations to rethinking their supply chains or investing in green initiatives.
According to Phil Mills, Deloitte Global Tax & Legal Leader, to “truly deliver value to the business, the tax function needs to rethink its resourcing model and transform its technology infrastructure to create capacity and control costs”.
And the good news, according to Mills, is that tax and business leaders have more options at their disposal to achieve this.
Reflecting the insights of global tax and finance executives at global companies, Deloitte’s Tax Operations in Focus study reveals the six issues at the top of tax and finance leaders’ agenda.
Trend 1: Businesses seek more strategic counsel from tax
Companies are being pushed to develop new digital products and distribution channels and accelerate sustainable transformation and this is taking them into uncharted tax territory. Tax leaders say their teams must have the resources and skills to give deeper advisory support on digital business models (65%), supply chain restructuring (49%) and sustainability (48%) over the next two years. This means redrawing the boundaries of what tax professionals focus on, and accelerating adoption of advanced technologies and lower-cost resourcing models to meet compliance requirements and free up time.
According to Joanne Walker, Group Tax Director, BT Group PLC, "There’s still a heavy compliance load today, but the vision for the future would be that much of that falls away, and tax people become subject matter experts who help program the machine, ensure quality control, and redirect their time to advisory activity.”
Trend 2: Tipping point for resourcing models
Business partnering demands in the tax department are on the rise, but 93% of tax leaders say their department’s budget is remaining flat or falling. To ensure that the tax function can redefine itself as a strategic function at the pace that is required, leaders are choosing to move increasing amounts of compliance and reporting to a combination of shared service centers, finance departments, and outsourcing providers that have invested in best-in-class technology.
Trend 3: Digital tax administration is moving faster than expected
in addition to the rising focus of the corporate tax department partnering with their business counterparts, transformative changes to the way companies share tax information with revenue authorities is also creating an imperative to modernize operations at a faster pace. Nine in 10 (92%) respondents say that shifting revenue authority demands on digital tax administration will have a moderate or high impact on tax operations and resources over the next five years—and several heads of tax said the trend is moving faster than expected.
"It’s really stepped up in the last couple of years," says Anna Elphick, VP Tax, Unilever. "Tax authorities don't just want a faster turnaround for compliance but access into a company’s systems. It's not unreasonable to think that in a much shorter time than we expect, compliance will be about companies reviewing a return that's been drafted by the tax authorities."
Trend 4: Data simplification and lower-cost resourcing are top priorities
Tax leaders said that simplifying data management (53%) and moving to lower-cost resourcing models (51%) must be prioritized if tax is to become more proactive at delivering strategic insights to the business. Many tax teams are ensuring that they have a seat at the table as ERP systems are overhauled, which is paying dividends: 56% of those that have introduced NextGen ERP systems are now highly effective at supporting the business with scenario-modeling insights. Only 35% of those with moderate to low use of NextGen ERP systems said the same.
At Stryker, “we automated the source P&L process for transfer pricing which took a huge burden off of the divisions," says David Furgason, Vice President Tax. "Then we created a transfer price database to deposit and retrieve data so we have limited impact on the divisions. We are moving to a single ERP platform which will help us make take the next step with robotics.”
Trend 5: Skillsets are shifting
Embedding a new data infrastructure and redesigning processes are critical for the future tax vision. Tax leaders are aligned — data skills (45%) and technology process experience (43%) are ‘must have’ skills in a tax department of the future, but more traditional tax specialist knowledge also remains key (40%). The trick to success will be in tax leaders facilitating the way these professionals, with their different backgrounds, can work together collectively to unlock lasting value.
Take Infineon Technologies, which formed a VAT technology and governance group "that has the right knowledge about how to change the system to ensure it generates the right reports", according to Matthias Schubert, Global Head of Tax. "Involving them early was key as we took a greenfield approach, so we could think about what the optimal processes would look like and how more intelligent systems could make an impact
Trend 6: 2020 brought productivity improvements
Improved productivity (50%) and accelerating shifts to remote working (48%) were cited as the biggest operational benefits to emerge from COVID-19-driven disruption. But, as 78% of leaders now plan to embed either hybrid or fully remote models in the tax function long term, 34% say maintaining productivity benefits is a top concern. And, as leaders think about building their talent pipeline and strengthening advisory skill sets, 47% say they must prioritize new approaches to talent recognition and career development over the next two years, while 36% say new processes for involving tax in business strategy decisions must be established.