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. 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.
Our country’s largest companies don’t need a tax break; rather, 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 reduction in corporate tax rates, but only if accompanied by the elimination of costly loopholes that only benefit large corporations.
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. Indeed, the White House’s proposal would add a vast $5.5 trillion to the deficit over 10 years. Small businesses are not asking for a lower tax rate in a vacuum; instead, they 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 very few small firms. Nearly 7 in 10 pass-through entities already pay 15% or less. Instead, this proposal would primarily benefit hedge fund managers, lobbyists, lawyers and investment bankers—not Main Street small businesses.
What’s more, this proposal seems to perpetuate the myth that ending the estate tax will help small business owners. In reality the estate tax, which only applies to estates valued above $11 million for married couples, impacts almost none of our nation’s 28 million small businesses and small farms.
In sum, any reforms to the nation’s tax code must create opportunities for small businesses and encourage startups and entrepreneurs. To do that, we must take steps to level the playing field, simplify the tax code and ensure fairness. This includes:
- Eliminating unfair corporate loopholes while responsibly lowering business tax rates in a manner that ensures a net revenue increase to bring down our deficit and fund key programs.
- Ensuring any changes to the corporate and personal tax code have a significant, direct benefit to small businesses, as opposed to large businesses and hedge funds.
- Allowing pass-though entities and C-Corp small businesses to deduct their first $25,000 of profit, supporting small businesses from the bottom-up rather than the top-down proposal to lower rates to 25%, 20% or 15%. This policy could be accompanied by a phase-out for businesses with more than $150,000 in income. This will benefit the vast majority of businesses (70%) at the lower end of the income spectrum.
- Cracking 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.
- Ending the ability of corporations to defer paying taxes on offshore profits, which hurts the economy, 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. Any attempt to repatriate existing offshore profits in exchange for a lower rate, without ending the deferral moving forward, will only perpetuate this costly inequity in our system.
- Ending other inequitable corporate loopholes:
- Accelerated depreciation: Most small business owners don’t have large enough capital expenditures to benefit from this loophole that costs $400-600 billion over 10 years.
- U.S. production/manufacturing credit: This credit 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 and it costs the U.S. $20 billion over 10 years.
- Upholding the estate tax in its current form, understanding that it currently protects virtually all small businesses and family farms.
- Ensuring parity between online and bricks-and-mortar businesses with a reasonable and fair Internet sales tax solution.
- Simplifying and expanding the small business tax credit created by the Affordable Care Act—helping more small businesses qualify for and utilize it.
- Passing healthcare tax equity for the self-employed so that freelancers can deduct their healthcare expenses from their FICA tax obligations.
- Creating tax incentives for angel investors. More than half of states offer tax incentives for angel investors. Federal support of these efforts would encourage more local and state governments to consider such measures.