[graphene]

they should state that more clearly then, if that is their intention.. like this it seems to me as if an engineer who designs some important technological invention and starts a startup around it, would be excluded... Also, would it be that bad if a significant amount of companies changed their formal structure in order to take advantage of this? It would mean an across-the-board incentive to create (and grow) companies, does it really matter that much what sector they're in?

[byrneseyeview]

Yes, it matters. Most smaller companies tend to be service companies, because they don't have huge economies of scale. Most product companies tend to be larger -- it's easy to moonlight as a designer who figures out what box you should sell a lightbulb in, but you can't moonlight as the guy building the lightbulbs, because you need tens of millions of dollars to manufacture them profitably.

A subsidy to small businesses that didn't exclude service businesses would have the effect of making more people want to work for service companies. Which is fine, except that they produce negligible exports. If you're selling lightbulbs, you make money in India by selling them there; if you're a lawyer, the way you make money in India is by hiring an Indian lawyer in India, and somehow convincing this lawyer to give you a fraction of his billings (so most of the money stays behind).

Given the potential trade deficit problems, I suspect Obama wants to focus on subsidizing businesses that can export.

[sethg]

Good point.

Also, the income of a service company is mostly going into the pockets of the service providers, and if those service providers are well-paid then they're more likely to save their marginal dollar instead of spending it. So from a Keynesian point of view, this is not the kind of business you want to throw money at during a recession.

[graphene]

as for the proliferation of service comanies if they weren't exempted, I think the market should (and will) determine an appropriate supply of services, not the legislature. The fact that the bulk of these comanies will create negligible exports should not count against them any more than it should count against a product company which is only active within national borders.

[rdl]

The actual tax code defines "PSC" professional services corporations as described in the above summary, so I assume the implementation of this policy will just exempt PSCs by name.