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Robert Reich: The Revolt of Small Business Republicans

Can it be that America’s small businesses are finally waking up to the fact they’re being screwed by big businesses?

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Flickr image via MIT-Libraries.

By Robert Reich
By arrangement with Robert Reich

For years, small-business groups such as the National Federation of Independent Businesses have lined up behind big businesses lobbies.

They’ve contributed to the same Republican candidates and committees favored by big business.

And they’ve eagerly connected the Republican Party in Washington to its local business base. Retailers, building contractors, franchisees, wholesalers, and restaurant owners are the bedrock of local Republican politics.

But now small businesses are breaking ranks. They’re telling congressional Republicans not to make the deal at the very top of big businesses’ wish list–a cut in corporate tax rates.

“Given the option, this or nothing, nothing is better for our members,” the director of legislative affairs at Associated Building Contractors told Bloomberg News. (Associated Building Contractors gave $1.6 million to Republicans in the 2014 midterm elections and nothing to Democrats.)

Small businesses won’t benefit from such a tax deal because most are S corporations and partnerships, known as “pass-throughs” since business income flows through to them and appears on their owners’ individual tax returns.

So a corporate tax cut without a corresponding cut in individual tax rates would put small businesses at a competitive disadvantage.

The fight is significant, and not just because it represents a split in Republican business ranks.

And since a cut in the individual rate isn’t in the cards–even if it could overcome the resistance of Republican deficit hawks, President Obama would veto it–small businesses are saying no to a corporate tax cut.

The fight is significant, and not just because it represents a split in Republican business ranks. It marks a new willingness by small businesses to fight against growing competitive pressures from big corporations.

In case you hadn’t noticed, big corporations have extended their dominance over large swaths of the economy.

They’ve expanded their intellectual property, merged with or acquired other companies in the same industry, and gained control over networks and platforms that have become industry standards.

They’ve deployed fleets of lawyers to litigate against potential rivals that challenge their dominance, many of them small businesses.

And they’ve been using their growing economic power to get legislative deals making them even more dominant, such as the corporate tax cut they’re now seeking.

Contrary to the conventional view of an American economy bubbling with innovative small companies, the rate that new businesses have formed has slowed dramatically.

All this has squeezed small businesses–undermining their sales and profits, eroding market shares, and making it harder for them to enter new markets.

Contrary to the conventional view of an American economy bubbling with innovative small companies, the rate that new businesses have formed has slowed dramatically.

Between 1978 and 2011, as big businesses expanded and solidified control over many industries, the pace of new business formation was halved, according to a Brookings Institution study released last year.

The decline occurred regardless of the business cycle or which party occupied the White House or controlled Congress.

Contributing to the drop was the deregulation of finance–which turned the biggest Wall Street banks into powerhouses that swamped financial markets previously served by regional and community banks. Not even Dodd-Frank has slowed the pace of financial consolidation.

In consequence, many small businesses can’t get the financing they once got from state and local bankers. Over the past two decades, loans to small businesses have dropped from about half to under 30 percent of total bank loans.

That means the Fed’s rock-bottom interest rates haven’t percolated down to many small businesses.

Tensions have also grown between giant franchisors–restaurant chains, fast-food corporations, auto manufacturers, giant retailers–and their franchisees.

Franchisees have found themselves trapped in contracts that siphon off profits to parent companies, give franchisors the right to unilaterally terminate the agreements, and force franchisees into mandatory arbitration of disputes.

Complaints are mounting about parent corporations closing successful franchisees for minor contract violations in order to resell them at high prices to new owners.

Meanwhile, small businesses are feeling the same financial pinch the rest of us endure from big corporations whose growing market power is letting them jack up prices for everything from pharmaceuticals to Internet connections.

So the willingness of small business groups to take on big business on its top legislative priority could mark the start of a political realignment.

If small businesses were willing to ally themselves with consumer, labor, and community groups, they could press for stronger antitrust enforcement against giant corporations.

Such an alliance might even become a powerful voice for campaign-finance reform, containing the political clout of giant corporations.

As well as for breaking up Wall Street’s biggest banks and strengthening community banks.

They could also get legislation banning take-it-or-leave-it contracts requiring mandatory arbitration.

Such an alliance might even become a powerful voice for campaign-finance reform, containing the political clout of giant corporations.

Don’t hold your breath. Small business groups have done the bidding of big business for so long that the current conflict may be temporary.

But the increasing power of big corporations cries out for new centers of countervailing power.

Even if the political realignment doesn’t happen soon, small businesses will eventually wake up–and could play a central role.

Robert B. Reich, Chancellor’s Professor of Public Policy at the University of California at Berkeley, was Secretary of Labor in the Clinton administration. Time Magazine named him one of the ten most effective cabinet secretaries of the twentieth century. He has written thirteen books, including the best sellers Aftershock: The Next Economy and America’s Future and The Work of Nations: Preparing Ourselves for 21st Century Capitalism. His latest, Beyond Outrage, is now out in paperback. He is also a founding editor of the American Prospect magazine and chairman of Common Cause.

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