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Why Family Businesses Matter

Web Memo

Title

Why Family Businesses Matter

What Do They Look Like, How Many Are There, and How Much Do They Contribute to Society?

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State and local politicians often argue that governments should use tax breaks and other incentives to attract large corporations to their jurisdictions because corporations employ many people. Family-owned businesses, each of which employs few people on average, are often regarded as occupying niche markets and ignored as being of little economic significance. A cursory look at the data appears to support this view. The average non-family business with paid employees employs more than three times the number of workers as does the average family business. This, however, ignores differences in the numbers of firms. Family firms outnumber non-family firms by almost four to one (Figure 1), meaning that state and local governments would likely see better job growth from adopting family business-friendly policies than from seeking to tilt the playing field in favor of large firms.

To make matters worse, it is not clear that the lucrative incentives that state and local governments offer to large corporations actually generate jobs. The Mackinac Center for Public Policy has studied the relationship between government subsidies and job creation over the period 1998 through 2002 in which several Michigan companies received a total of $120 million in government incentives in exchange for the promise that the companies would create 775 jobs. The Michigan auditor general’s office subsequently found that the number of jobs at the companies had actually declined by 222. Similarly, the Tax Foundation reports that every independent study of film tax credits have found that the credits are money-losers for the states with the average state recouping 30 cents for every dollar of incentives it provides to the film industry. Despite this, many states actually compete with each by offering ever more lucrative film tax credits.