Policy Agenda: Tax Policy
For too long, our nation’s tax system has benefited the wealthiest Americans and large multinational corporations—leaving the rest of the country, particularly small business owners, to foot the bill. This is why 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. Small businesses can certainly benefit from a streamlined tax system, less paperwork and a targeted, responsible reduction in their tax rates, but only if accompanied by the elimination of costly loopholes that primarily benefit large corporations, such that the result is revenue-positive, or at least revenue-neutral.
Small Business Majority’s polling has shown that 90% of small business owners believe big corporations are using loopholes to avoid taxes that small businesses have to pay, and 92% believe corporations’ use of those loopholes is a problem. Similarly, 9 out of 10 small business owners believe that U.S. multinational corporations’ use of these loopholes to shift U.S. profits overseas is a problem.
That’s why we’re concerned by the recently signed Tax Cuts and Jobs Act. We believe the bill could hurt small businesses because it will drastically increase the deficit by lowering the corporate rate to 21% without getting rid of corporate tax loopholes. Indeed, the proposal would add a vast $1.4 trillion to the deficit over 10 years according to the Congressional Budget Office. 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.
The bill’s treatment of pass-throughs won’t help most small business owners because it will still give the bulk of the benefit to the wealthiest pass-through entities, rather than Main Street. The bill is structured to favor wealthy pass-through businesses, providing a business owner with $500,000 in income almost 20 times the amount of savings as a business owner with $75,000 in income. Lowering top marginal rates also won't make a difference, as roughly 87% of pass-through entities already pay a marginal tax rate of 25% or less. Instead, this proposal would primarily benefit hedge fund managers, lobbyists and investment bankers—not most Main Street small businesses.
If policymakers 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 his/her business off the ground—rather than giving tax breaks to those who need it least.
- Ensure any changes to the corporate and personal tax codes have a significant, direct benefit to small businesses and self-employed individuals, as opposed to large businesses, hedge funds and the very wealthy.
- When considering a targeted, responsible reduction in business tax rates, ensure that it is accompanied by the elimination of costly loopholes that primarily benefit the wealthy and large corporations, such that the result is revenue-positive, or at least revenue-neutral.
- Instead of reducing pass-through business income tax rates in a manner that benefits only a small percentage of businesses, enact a provision to benefit most small businesses from the “bottom up.” For example, we propose allowing small businesses to deduct their first $25,000 in business income whether or not they file their tax-returns as a pass-through entity or as a C-Corporation.
- Consider a modest reduction of the nominal corporate tax rate, thus reducing the actual tax rate for most C-Corp small businesses, while eliminating unfair, inefficient tax loopholes in a manner that ensures a net revenue increase to bring down our deficit and fund key programs. Loopholes that can be eliminated include:
- Offshore tax deferral: This loophole costs the U.S. more than $1 trillion over 10 years and creates an unequal playing field for small businesses that are paying their fair share. It almost entirely benefits about 30 select multinational corporations. Moreover, any attempt to repatriate existing offshore profits in exchange for a lower rate, without ending deferral moving forward, will only perpetuate this costly inequity.
- Accelerated depreciation: Small businesses can already deduct up to $500,000 in capital expenditures under existing law—this provision should be retained. But, most small businesses don’t have additional capital expenditures that enable them to benefit from the larger accelerated depreciation loophole that costs $400-600 billion over 10 years.
- U.S. production/manufacturing credit: This credit primarily benefits large corporate special interests and costs $190 billion over 10 years.
- Carried interest: This loophole only benefits hedge funds by allowing them to pay taxes on ordinary income at special lower capital gains rates, costing the U.S. $20 billion over 10 years.
- Reject the current proposal for “full expensing” of all capital purchases. Small businesses can now expense their first $500,000 of capital expenditures under Section 179. Allowing for full expensing above that level would have little benefit to them.
- Oppose any efforts to reduce top individual tax rates. It is a myth that top individual tax rates adversely harm Main Street small businesses. Only 1.7% of pass-through businesses pay income tax at the top rate.
- Oppose the enactment of a “territorial” corporate tax system that would allow a select few large multinational corporations to game the system by funneling their profits to the lowest-taxation foreign jurisdictions.
- Crack down on the ability of large corporations to reduce their tax burden simply by parking their profits offshore or moving their headquarters outside the country.
- Uphold the estate tax in its current form, understanding that it currently protects virtually all small businesses and family farms.
- Ensure parity between online and bricks-and-mortar businesses with a reasonable and fair Internet sales tax solution.
- Simplify and expand the small business tax credit created by the Affordable Care Act—helping more small businesses qualify for and utilize it.
- Pass healthcare tax equity for the self-employed so that freelancers can deduct their healthcare expenses from their FICA tax obligations—just like other business entities.
- Enact the bipartisan Investing in Opportunity Act that will help revitalize economically distressed communities by, among other things, allowing investors to temporarily defer capital gains recognition if they invest in an “opportunity zone.”
- Increase limits for deducting start-up and organizational expenses from the current $5,000 levels to $10,000 each.
- Allow very small firms to use a simplified method of cash accounting.
- Create tax incentives for angel investors. More than half of states offer tax incentives for angel investors. Federal support for these efforts would encourage more local and state governments to consider such measures.
- Oppose state and local tax policies that amount to “giveaways” to large corporations at the expense of investing in Main Street small businesses in local communities.