Economic Impact of the Corona Virus
The economic impact of this Corona virus is going to put our economy into a deep ditch, but it will pass. A quick recovery could be helped along by a special tax relief package targeted at the middle class and small business owners. This would provide the stimulus needed to generate confidence, security, and operating cash for both consumers and businesses.
Justification? Operating capital is the lifeblood of any company. A mature, profitable, well run business will build up substantial cash reserves and credit lines over years of operations to get through a downturn. I always liked to have the ability to make 3 months' worth of payroll even in a worst case scenario. The danger comes in with an economic slowdown like I lived through in 2008-2009. We had been in an expansion phase and had started up a new line of business that had great promise, but wasn't yet profitable. We were plowing operating cash into it, creating jobs and revenue, but it took time to build credibility in the new market and land the substantial projects that we knew we could win. We were leaning forward very hard into growth because we believed in the people and the market. It was a good business, and we were a profitable company, but the investment in growth strained our cash flow.
Of course, there are always options for financing growth, but organic financing through profit was our first choice. Then the slowdown hit. Some large clients slow payed bills, some went out of business, and a few cancelled contracts. It happened so quickly there was little time to adjust. Credit became incredibly tight, and financing was nowhere to be found. So, what to do? We were only a few weeks from running out of cash to meet payroll and tax requirements. We could have cut 20 jobs and contracted to a safe size, which would have been the textbook solution. That would have put 20 people on unemployment payments and possibly other government assistance. Luckily, I had some home equity I was able to tap and give us the capital needed to get by. In my instance we were very fortunate, and my thrift in early years paid off. However, if I hadn't already had that equity line in place, I wouldn't have been able to get it. We would have either gone out of business, or had massive layoffs. Both of those options would have had a cascade of bad impacts downstream for both our employees, clients, and vendors. It would have also been costly to tax dollars in the form of government assistance. At that point, I had been in business for 12 years. Many business haven't been around that long, and it makes it even tougher for them.
Now, if the government had come in with an offer of tax relief through a one-time reduction on personal income tax rate, it would have immediately helped the situation and taken off pressure. It would have been much less expensive to everyone concerned. I say personal income because most profits in SMBs flow through to the owners because of the structure most often used by small businesses. So, it wouldn't have helped the large corporations with deep pockets and the resources to weather the storm. Rather, it would have freed up money for those business owners who were risking everything to keep jobs in place and keep the economy moving. It would also have resulted in tax refunds for more middle class people, who would spend the refunds, injecting much needed cash into the economy. I'd be the first to say you don't want government picking winners and losers in the economy, but it seems like a little stimulus could prevent a lot of suffering. An across the board personal tax rate reduction seems a fair way to do it, benefiting both consumers and small business owners. I see today that the Fed just announced a half point interest rate decrease, and I think that is also a very helpful action.