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 White House’s 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% 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. Likewise, Speaker Ryan’s tax reform plan would result in $3.1 trillion in lost revenues in the first decade. 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% would be a boon for small business, in fact, this would impact only a minority of small firms. Nearly 7 in 10 pass-through entities already pay a marginal tax rate of 15% or less. Instead, this proposal would primarily benefit hedge fund managers, lobbyists and investment bankers—not most Main Street small businesses. Instead we should look to a “bottom-up” tax reduction that benefits the vast majority of small firms.
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.
- Allow pass-though entities and C-Corp small businesses to deduct their first $25,000 of profit, thus benefiting the vast majority of small businesses from the bottom-up rather than passing current top-down proposals that 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 deduction should be accompanied by a phase-out for businesses with $150,000-200,000 in income to ensure it benefits the entities most in need.
- Reduce the nominal corporate tax rate to 28%, 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 50-60 select multinational corporations and no small businesses. 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.
- Oppose any efforts to reduce top individual tax rates. It is a myth that top individual tax rates adversely harm Main Street small businesses. The current top rate is paid by less than 2% of pass-through business owners, while only 4% pay more than 28%.
- 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.