The House tax reform bill passed last week is really not much, if any, of a middle-class tax cut. Even the Joint Committee on Taxation — a bipartisan congressional group — concluded “the vast majority” of Americans (92 percent) will either pay less or see little change over the next five years and after that, only 40 percent of Americans will pay less taxes.
But then again, this bill was never really meant to benefit individuals. It was meant to benefit businesses. And to that end, it succeeds. Big corporations should be very happy with its passage, and so should small firms like mine. Why? Two big reasons.
Reason One: Most small businesses will pay less taxes.
According to the Tax Foundation, 90 percent of small businesses are pass-through entities . . . like mine (meaning the income produced by the business is accounted for in the owner’s personal tax filings). Research from 2010 has shown that the typical small business owner makes anywhere from $35,000 to $75,000 per year — reasonable numbers even today considering that the vast, vast number of small businesses are merchants, restaurateurs and operators of very small mom-and-pop firms, freelancers and independent contractors. The House bill will (after some last minute changes) allow most of these business owners to take advantage of a tax rate of 9 percent on their first $75,000 of income with a cap of 25 percent on the rest.
True, this rate doesn’t fully take effect until 2022. Yes, the Senate bill treats pass-throughs differently so a reconciliation will be needed. But these rates will be — for most of us — lower than the amounts we have been paying when our income flowed through to our 1040s and was taxed at our individual rates. We also will still be able to take advantage of deductions for capital expenditures and tax credits for research, development and hiring.
This is a big win. Despite adding $1.5 trillion to our already terrifyingly high national debt, most of us will see a tax cut which is welcome news after years of tax and regulatory increases. Still, some small business owners I know complain that it’s not enough. And others say that big corporations are getting an even bigger breaks. So let’s bring on Reason Two.
Reason Two: Yes, Big corporations are getting a bigger tax break than small businesses.
Both the House and Senate bills will see corporate rates drop tremendously — from 35 to 20 percent. In addition, the House is giving those companies hoarding their billions overseas a chance to bring that money back to the United States for only a 12 percent taxation rate. Corporate welfare? No … it’s actually economic opportunity. This is great news for big companies. But it’s even better news for small businesses. Why?
Because small businesses need big businesses. My most profitable clients are big companies. Many of my small clients rely on corporate customers for their growth and income. Big companies hire small businesses to do all sorts of things — from construction to maintenance to landscaping to computer repairs to providing temporary workers. Big companies also employ people who — when times are good and their salaries are increasing — go home and buy pizzas, hire landscapers, shop for clothes and shower the small businesses in their community with the fruits of their disposable corporate incomes.
When tax rates go down, big companies have more options with their money. Yes, they can step on their smaller competitors. But they can also expand. They can invest in new ventures. They can hire people. Will they? That remains to be seen. But even if they just bank their tax savings, those funds will get deposited with financial institutions who then finance loans and services back to individuals and small businesses. When tax rates go down more companies from around the world are attracted to open up shop in the United States. They also hire and invest. So yes, big companies are getting a big tax break. Good for them. And good for the countless small businesses who will share in those rewards.
The aim of the House tax reform bill is to enable businesses — regardless of size — to grow, invest and hire. This means jobs, opportunities and income. The big question is not whether the bill is good for businesses. It is. Or whether it helps small businesses. It does. The big question is whether the business community will respond.