The COVID crisis has highlighted and elevated to the national conversation a number of challenges. To name a few:
How to increase tax revenue to meet budget shortfalls?
How to reduce unemployment?
How to make “local” and regional economies more resilient?
How to increase domestic production of “essential” products?
How will global trade be impacted by CoVid?
The solution to each of these challenges will depend in a significant way on proactive legislative efforts are targeted at the SME sector (small and medium sized enterprises). It was President Reagan who first highlighted SMEs as the “engine of growth” for America. It holds as true for today as it did then.
On the employment front the SBA reports based on the 2010 census that Small business make up:
99.7 percent of US employer firms,
64 percent of net new private-sector jobs,
49.2 percent of private-sector employment,
42.9 percent of private-sector payroll,
46 percent of private-sector output,
43 percent of high-tech employment,
98 percent of firms exporting goods, and
33 percent of exporting value.
While difficult to calculate precisely, data confirms that US SMES not only pay a significant portion of government taxes at all levels but also act as the tax collectors and compliance officers for much of the US tax system.
Finally, Americans have learned that resiliency requires a localization strategy not only for economic well-being but also for the delivery of other public goods such as health care and emergency services. Going forward all Americans likely agree on the necessity for a push to accelerate localization of production in strategic sectors and for developing a “warning” system to alert when production of essential goods and services is faltering.
Economic development experts have long known that participation in complex webs of linkages increase the likelihood of success of SMEs. Backward and forward linkages with other domestic and perhaps foreign enterprises bring growth, innovation and economic resiliency. Research on this topic is extensive in all economies – high, medium and low income countries. Notable examples include with respect to the German automotive industry – see for example Akos Domotorfi, Tamas Perter, Kristian Szabo, Mathematical Modeling of Automotive Supply Chain Networks, and from studies of clusters and networks in Brazil – see Judith Tendler, Good Government in the Tropics.
The first step in implementing initiatives to broaden and deepen the supply networks of American SMEs will be to map
them ideally along with a commitment to develop an Information Domain on which initiatives can be developed, delivered and monitored.
A North American wide system of self-assigned codes for categorizing enterprises has been adopted. Developed jointly by Canada, the US and Mexico the North American Industry Classification System (NAICS) divides and classifies enterprises as follows:
20 sectors (2 digit codes)
102 subsectors (3 digit codes)
324 industry groups (4 digit codes)
710 industries (5 digit codes)
The system was developed for statistical analysis. However, the codes have been used for some government tendering processes.
To date America has not enacted a process by which NAICS (or any other coding system) can be used to track every business to business transaction and thereby map supply networks. One possible way to do so would be through the introduction of a Goods and Services Tax akin to that in Canada. To be clear – that does NOT mean every transaction is taxed. To the contrary. But each transaction would be recorded and mapping would be possible. Without the data and the ability to map American policy makers are flying blind and are at a significant competitive disadvantage with other countries (e.g. EU, Canada) where such a process exists.
One should not recoil at the prospect of using tax as a means to achieve broader goals. American tax laws are replete with provisions the primary purpose of which is to implement social policy wholly unrelated to collecting money to support the budget. In this case, tax is being used to create an information gathering channel to support economic growth initiatives.
By: Virginia Davies
