In light of President Trump’s recent address to Congress in which he called for corporate tax reform, some are imploring lawmakers to save small businesses from what has been termed “some of the most anti-business tax rates and rules in the world.”
While tax reform is essential to helping small businesses, many clamoring for changes to the tax code are thinking only of the wealthiest entrepreneurs and not the rest of America’s 28 million small businesses that would benefit from lower corporate tax rates only if that reduction is accompanied by the elimination of costly loopholes that boost profits for large corporations.
In a recent opinion piece published by The Hill, Stephen Moore, of the Heritage Foundation, and Alfredo Ortiz, of the Job Creators Network, perpetuated a misleading trope that gets dragged out, year after year — that small “businesses have been struggling under the weight of a 40 percent marginal federal tax burden, which can reach 50 percent when state taxes are included, and 60 percent when payroll and other taxes are added in.”
While these staggering tax rates are the reality for a handful of businesses owners (those with personal income over $467,000 if married or $415,000 if single), the percentage of small employers that actually earn enough to land in the top income tax bracket is miniscule.
In fact, a Treasury Department study found that a mere 2.5 percent of small business owners earn enough income to qualify for the top individual tax bracket (39.6 percent) or the second-highest bracket (35 percent).
What’s more, according to data from the U.S. Census Bureau, only one million of America’s 28 million small businesses pay at the corporate rate. For the more than 90 percent that pass through their income, 97 percent fall below the 33 percent tax bracket and 92 percent are below the 28 percent bracket.
It is obvious from these numbers just how few small businesses are even close to paying rates at the top two brackets, let alone actually in them.
Moore and Ortiz cited a tax proposal that they think could benefit small businesses, but it is not without serious drawbacks. They noted that House Ways and Means Committee Chairman Kevin BradyKevin Patrick BradyHouse panel advances key portion of Democrats' .5T bill LIVE COVERAGE: Ways and Means to conclude work on .5T package LIVE COVERAGE: Tax hikes take center stage in Ways and Means markup MORE (R-Texas) would like to lower the top tax bracket to 25 percent.
Given how few small business owners pay more than even the 28 percent tax rate, it’s clear that a proposal to lower the top tax rate to rate to 25 percent would only decrease federal revenue, which will explode the national deficit without saving small businesses much money.
What small business owners really need is comprehensive corporate tax reform that would lower the top corporate bracket to 28 percent in exchange for eliminating loopholes that almost exclusively benefit large corporations. This type of reform is overwhelmingly supported by small businesses.
Small Business Majority’s scientific opinion polling found 90 percent of small employers say big corporations use loopholes to avoid taxes that small businesses have to pay, and 92 percent say it is a problem when big corporations use such loopholes. What’s more, three-quarters of owners say their small business is harmed when loopholes allow big corporations to avoid taxes.
Instead of looking out for the very top earners, lawmakers who genuinely want to help small employers must instead focus on lowering corporate rates in a manner that ensures a net revenue increase to bring down our deficit and fund key programs.
Doing so would go a long way toward leveling the playing field for small businesses and ensuring that they can continue to be a primary source of American jobs.
John Arensmeyer is the founder & CEO of Small Business Majority, a national small business advocacy organization based in Washington, D.C.
The views expressed by contributors are their own and not the views of The Hill.