As President Donald Trump and congressional leadership stump for tax reform, it is becoming increasingly clear they do not understand why most small businesses will not benefit from drastically slashed corporate tax rates.
House Speaker Paul Ryan’s (R-Wis.) tax blueprint, for example, calls for reducing the corporate rate to a flat 20 percent because he believes this will help small employers.
President Trump, meanwhile, has floated a maximum corporate rate of 15 percent, saying recently that he intends to “dramatically reduce the tax rate for America’s small businesses, which have created more than 60 percent of new private-sector jobs in the recent past.” He claimed this rate reduction would bring relief to millions of entrepreneurs.
That all sounds great, doesn’t it? While President Trump is right about the importance of small businesses to job creation, he, Speaker Ryan and other congressional leaders calling for tax cuts have a lot to learn about how our tax system impacts small firms. Here is what they need to know if they want to create real tax relief for America’s job creators.
Our nation’s tax system is structured in a way that benefits the wealthiest Americans and large multinational corporations — leaving the rest of the country, particularly small business owners, to foot the bill.
Small Business Majority’s scientific opinion polling found that 90 percent of small business owners believe big corporations are using loopholes to avoid taxes that small businesses have to pay, and 92 percent believe corporations’ use of those loopholes is a problem.
We need a tax system that benefits America’s entrepreneurs who are focused on growing their enterprises and making payroll at the end of each month.
We agree that small businesses can certainly benefit from a streamlined tax system, less paperwork and a targeted, responsible reduction in their tax rates (changes some congressional leaders are calling for), but this must be accompanied by the elimination of costly loopholes that primarily benefit large corporations, such that the result is revenue-positive or at least revenue-neutral.
That’s why we’re troubled by the White House’s previously outlined proposal for tax reform. We believe the proposal would hurt small businesses because it would drastically increase the deficit by lowering the corporate rate to 15 percent without getting rid of corporate tax loopholes.
Small businesses are not asking for a lower tax rate in a vacuum, nor are they asking for tax cuts that are going to grow the deficit. Indeed, the White House’s proposal would add a vast $5.5 trillion to the deficit over 10 years.
Instead, small businesses want tax reform that will level the playing field so that they are not stuck footing the bill when large corporations take advantage of loopholes and avoid paying their fair share.
While some claim the White House’s proposal to cap the tax rate for pass-through entities to 15 percent would be a boon for small business, in fact, this would impact only a minority of small firms.
Nearly seven in 10 pass-through entities already pay a marginal tax rate of 15 percent or less. What’s more, the current top rate is paid by less than 2 percent of pass-through entities, and a mere 4 percent pay more than the 28 percent rate.
Instead, this proposal would primarily benefit hedge fund managers, lobbyists, lawyers and investment bankers — not Main Street small businesses.
Alternatively, if lawmakers want to help nearly all small businesses, they should look to a “bottom-up” tax reduction approach, which would benefit the majority of small firms by allowing pass-through entities and C-corporations to deduct their first $25,000 of profit.
This is a far better option than adopting current top-down proposals to lower the top rate to 20 percent or 15 percent, which will only benefit a select number of the wealthiest businesses and encourage some individuals to game the system by declaring themselves pass-through business entities.
This provision should be accompanied by a phase-out for businesses with $150,000-200,000 in income to ensure that it benefits the entities most in need.
If President Trump and his allies are serious about wanting to enact tax reforms that will help small business, they need to implement policies that will help all entrepreneurs —from the Main Street restaurants and independent retailers to the consulting firm with 25 employees to the solo-entrepreneur just getting their business off the ground — rather than giving tax breaks to those who need it least.