When it comes to the tax reform proposals being promoted by congressional Republicans, one of their own has come out against the plans because they won’t do much for America’s small businesses.
“We can’t leave anybody behind, which is why they came up with the 25 [percent] rate for pass throughs,” Sen. Ron Johnson (R-Wis.) said, himself a former small-business owner. “The problem is, neither the House or the Senate version really honored that commitment to pass-through businesses, which I argue are a huge engine of economic growth.”
Sen. Johnson is exactly right about the role of small businesses in our economy, and he’s right that neither the Senate nor the House of Representatives have offered proposals that would help more than a handful of small firms, while also blowing up the deficit by adding $1.5 trillion over 10 years.
Indeed, very few small businesses would benefit from capping the corporate tax rate at 20 percent, because so few pay the corporate rate to begin with. What’s more, entrepreneurs oppose lowering that rate without getting rid of corporate tax loopholes, because doing so would greatly increase the deficit while continuing to put small businesses at a disadvantage.
In fact, Small Business Majority’s recent scientific opinion polling found 85 percent of small-business owners feel the tax code unfairly benefits large corporations over small businesses and that corporations and wealthy Americans should be required to pay their fair share of taxes.
When it comes to pass-through entities, nearly nine in 10 businesses that pass through their income already pay at the 25 percent rate or less, and less than 3 percent would see any benefit under the proposed rate changes in the House plan.
While an amendment offered by Rep. Kevin Brady (R-Texas) to the original House bill that would help small businesses from the bottom up is a step forward, it is a problem that this provision does not begin to replace top-down tax breaks and that none of these tax breaks are paid for.
By keeping the top-down tax breaks, most of the benefits from the change will still benefit wealthier pass-through entities.
The Senate plan’s treatment of pass-throughs isn’t much better, because it will still give the bulk of the benefit to the wealthiest pass-through entities, rather than Main Street.
While we’re glad the Senate is making some attempts to take a bottom-up approach to helping pass-through entities by offering owners of sole proprietorships, S corporations and partnerships a deduction of a percentage of their income, it’s of limited help because it only applies to some profits, is overly complicated and creates more tax advantages for those at the top, rather than your typical small business.
If lawmakers truly want to give small businesses a tax cut, there’s a really easy way to do that: Allow small businesses to deduct their first $25,000in business income, whether or not they file their tax-returns as a pass-through entity or as a C-Corporation, accompanied by a phase-out for businesses with $150,000-200,000 in income to ensure that it benefits the entities most in need.
We’ve been saying for months that the Republican tax framework doesn’t do much to help small employers, and Sen. Johnson is one of few from his party to publicly admit that is true. This an important step, but it’s not enough.
There is still time to change the tax bills in both the House and Senate so that America’s job creators can actually receive an economic boost that will allow them to do what they do best — create job opportunities.