As you may have heard, both the House and Senate are feverishly working to pass a comprehensive tax reform package. Yesterday, the House passed its tax reform bill, while the Senate tax reform bill passed out of its Finance Committee. Although both versions of the bill are very different, one of the primary goals of both chambers has been to lower the corporate tax rate, saying that this will help spur capital investment and job creation. They also contain provisions that purport to help small businesses.
The problem is that these provisions will for the most part not impact small businesses at all, nor would they help spur investment.
Let’s start with lowering the corporate tax rate. In a previous blog post, we explained that most small businesses–70 percent of them– already pay taxes at a marginal rate of 15 percent or lower. The biggest benefits of lowering the tax rate from its current 35 percent will be the top earners among small businesses. Those who earn more than 50 percent of all small business income stand to benefit, not the smaller “Main Street” businesses.
Another component of the tax reform bills providing a benefit for “pass through” income, which is used by certain kinds of businesses. A business organized as partnerships or as “S” corporations can “pass through” their business profits to the business owners, who then report the income on their personal taxes rather than their business taxes. Both the House and Senate tax plans lower the maximum rate from 39.6 percent to 25 percent (House) and 35 percent (Senate) .
The trouble is, this benefit is not specifically aimed at small businesses. It would apply to all businesses that qualify, whether they’re large or small. Any service sector business, even if it is a partnership or S corporation, would not qualify at all, even though this is one of the largest growing sectors of the economy. Once again, those who stand to benefit from this provision are the highest income earners. Eighty-six percent of those who report pass-through income already are in the 25 percent tax bracket, so they will not benefit from lowering the maximum rate. Furthermore, there are limits on how much of income can be taxed at the pass through rate, and in the House bill, “passive” owners (those who are investors but not actively involved in the business) can apply the lowered rate to all of their income.
When it comes to spurring investment, it is already well known that businesses do not rely on tax incentives as a primary driver for when and where they invest. There are a host of other factors that they consider. Watch this short clip from the Wall Street Journal “CEO Council” in which the attendees are asked if they would increase investment if tax reform passes. Only a few CEOs raised their hands. As Vox explains, another reason for this is that corporate profits are a result of past activity– not new investment.
All in all, the rhetoric around tax reform and small businesses does not stack up in reality. The tax plans are designed to provide benefits to the wealthiest Americans. “Main Street” small businesses will not reap any benefits, and will not get any more help when it comes to accessing the capital, support and resources they really need. A real plan that would benefit small businesses and their communities would need to be built from the bottom up.