This article appears in the Summer 2018 issue of The American Prospect magazine. Subscribe here.
The small-business community is all too familiar with being used as a prop for tax cuts for the wealthy. From estate tax repeal to the corporate income tax cuts, “helping small business” is the go-to fig leaf for Republican tax-slashers.
“It is a tried and true tradition of big business to say they are doing something to help small business when just helping themselves,” says Frank Knapp, president and CEOof the South Carolina Small Business Chamber of Commerce and co-chair of Businesses for Responsible Tax Reform. “Small businesses are one of the most appreciated institutions in the nation, in contrast to big business.”
Small-business advocates like to point out that they are the real job-creators in the U.S. economy, having created nearly two-thirds of private-sector jobs since the 2008 economic meltdown. Yet the 2017 Republican Tax Act funnels benefits mainly to big and multinational corporations.
“For my business to do well, my neighborhood has to do well,” says Jim Houser, co-owner of Hawthorne Auto Clinic, a neighborhood garage in Portland, Oregon, with 13 employees, celebrating its 35th year in business. “My company prospers when I have more customers who are prosperous, with rising incomes, like pay raises, and declining expenses, like lower health-care costs. This tax giveaway neither raises my customers’ incomes nor cuts their expenses.” In fact, health insurance premiums are rising in Oregon directly because of GOPassaults on health care.
“I’m not opposed to targeted tax cuts and subsidies if they create value,” says Houser. “We have solar panels on the roof of our shop and I got a five-year tax break that made it possible. But tax breaks need to be focused, vetted, reasonable, and scheduled to sunset.”
“This law does not require the beneficiaries to hire even one more worker. It does not require giving anyone a raise in pay. There is no requirement to open a new plant, bring a factory back to this country, or prohibit one from leaving. None of these tycoons are my customer. Not one shops for tires at my store.”
To understand the Tax Act’s impact on private employers, it helps to know the difference between a C corporation and most small business enterprises. Most large public corporations like General Electric or Boeing are C corporations, subject to the corporate income tax rate. The new tax bill provides a “permanent” rate cut from 35 percent to 21 percent, a whopping 40 percent reduction. This rate cut is the biggest-ticket item in the Tax Act, and will cost $1 trillion over ten years, roughly two-thirds of the revenue lost.
An estimated 90 percent of small businesses are chapter S corporations, LLCs, partnerships, or sole proprietorships, whose owners “pass through” their business income to be taxed on their personal income tax returns. So these small-business owners are affected by the tax changes impacting all individual taxpayers.
The Tax Act does add a break for pass-through businesses, in the form of a 20 percent deduction. But the nonpartisan Joint Committee on Taxation estimates that in 2018, $17.8 billion, or 44.5 percent of the $40 billion in those tax breaks, will go to roughly 200,000 U.S. taxpayers making over $1 million who will claim the pass-through deduction.
High-end taxpayers get the lion’s share of the “pass through” tax break because the ultimate benefit reflects the business owner’s marginal tax rate. Envision a power-lawyer with $1 million in annual income. In 2017, that income was taxed at a top rate of 39.6 percent. Under the new rules, the lower top marginal tax rate is 37 percent. The 20 percent pass-through deduction on $200,000 of the lawyer’s income is worth a tax cut of $74,000.
Compare that to a business owner who earns $100,000. They pay the lower 2018 marginal tax rate of 22 percent and collect a pass-through deduction on $20,000 of their income that is worth $4,400. The tax cut to the larger business that earns ten times more income is more than 16 times larger.
For real small businesses, the temporary nature of the 20 percent pass-through is also problematic. If you’re making a decision about whether to expand, hire new people, purchase equipment, or open a new branch, you are watching for long-term signals.
“Small business wants the same certainty going forward with taxes as large corporations,” says Knapp. “In fact, they sold the permanent 40 percent tax deduction for C corps with the line, ‘Big business needs to have certainty so they can plan for the future.’ There was no consideration for applying the same logic to small business.”
Businesses for Responsible Tax Reform conducted a poll of small-business owners, heavily weighted to Republicans and red states. The poll found thin support for the new tax law. Most believe the tax cut is heavily tilted toward large corporations over small business. The fact that the tax cuts for corporations are permanent and the tax breaks for S corporations are temporary doesn’t encourage the sort of stability that small business needs. Some 69 percent reported that they have no plans to hire new employees as a result of the Tax Act, and 59 percent said they have no plan to increase wages.
These views were echoed in a similar poll of business entrepreneurs by the Kauffman Foundation, which found that more than 60 percent believed government didn’t care about businesses like theirs and was more focused on larger established companies. Only 7 percent of businesses polled by the National Small Business Association believe their tax preparations will be simpler under the new tax law—with the vast majority expressing concern about the cumbersome new rules and outrage about extra layers of complexity.
“Remember how tax reform started? We were going to be able to file our taxes on a postcard,” says Knapp. “Every legitimate small business organization has said this is so convoluted, it’s so complex, its going to cost us more money to do our taxes. My guess is it will cost more money and any tax benefit will be gone. This is a ‘pass through’ to the tax-preparation industry.”
The Tax Act passed with near-unanimous support from big corporations and the Republican lawmakers in Congress. It didn’t need, and didn’t get, widespread approval from small-business owners, save for the ultra-conservative National Federation of Independent Business. Even they professed opposition to the bill for a short while, lamenting that the bill “left too many small businesses behind.” But they reversed course after promises from House Ways and Means Chair Kevin Brady that a future bill would be better for them. No such bill has been forthcoming. Truly helping small businesses will require repealing this disaster of a bill and creating a tax reform that rewards honest, hardworking small-business owners.