Tax and Lend

Small-business subsidies


Congress created the Small Business Administration (SBA) in 1953 to fix a specific problem: Lenders allegedly pass over large numbers of creditworthy small businesses. An April study from the American Enterprise Institute (AEI) concludes there is no evidence such a problem exists.

The SBA distributes taxpayer-backed loans to entrepreneurs who have been rejected by at least one private lender. Veronique De Rugy—a resident fellow at AEI and a "French, Anti–American small business activist" according to the head of the American Small Business League—points out that if a large-scale market failure is holding back small American enterprises, business owners don't seem to have noticed. The nation's 25 million small-business owners access credit through a wide range of sources; those who can't find credit with banks turn to credit cards and friends. The vast majority of small businesses that go under do so because of low sales, not because they couldn't score a loan.

The SBA is also supposed to help mom-and-pop start-ups compete against entrenched, intimidating competitors. But the lion's share of SBA largesse goes to some of the least concentrated sectors of the economy, areas already crowded with small businesses able to succeed without taxpayer-backed loans: bars, dentist's offices, dry cleaners. The result, De Rugy concludes, is that small businesses aren't being subsidized to compete with big businesses so much as with other small businesses. Enterprises not backed by the SBA—99 percent of America's small businesses—pay loan rates reflecting their actual risk and are therefore at a disadvantage.

So there's one sense in which the SBA fulfills its mission to level the playing field: You don't have to be a big player to get in on the corporate welfare game.