The business case against the Republican tax reform victory

The Hill
December 26, 2017

By Frank Knapp, opinion contributor

With a massive corporate tax cut now signed into law by the president, there are some in Washington wondering why small businesses are not grateful. The public was told by the president and Republicans in Congress that wages would be increased and new jobs added by the entire business community if the tax bill, which cuts the corporate tax rate by 40 percent, became law.

However, that’s not the small business reaction. It’s not that small businesses are unappreciative of the need for tax reform. It’s that they feel their voices weren’t respected in the process and their needs are not addressed in the final law. Why do they feel that way? Witness the numbers.

The new tax cuts were aimed largely at corporate America and the very wealthy, with a projected 83 percent of the benefits going to the top 1 percent of earners. Neither of these categories characterize the vast majority of our nation’s small business owners who organize their businesses as something other than a C corporation.

Corporations had their tax rate slashed from 35 percent to 21 percent with no conditions. Easy. What did small businesses get? An even more complicated tax code that is titled even further in favor of big businesses and that will do little to help them grow their businesses and the economy.

The tax cut for small business pass-through income is a hard to understand, convoluted mess that CPAs will be trying to figure out for their clients for months, maybe even years, to come. Instead of a large, straight reduction of tax rates on income, the law offers a meager tax cut via a complex formula. Pass-through income will have 20 percent excluded from taxation but with stipulations for which small businesses qualify and for how much, depending on W2 wages paid.

Then, as an additional insult, any tax cuts for small businesses will come to an end in 2025, unlike the permanent tax cuts for big corporations. The reason offered for the latter is that corporations need certainty for investing, implying that small businesses do not.

This new law also does what no real Main Street business would ever do. It increases our nation’s debt by $1.5 trillion, an amount that no reputable economist projects will ever be covered by new tax revenue. If a small business put itself into debt that wouldn’t lead to increased revenue to cover the loan and add profits, that business would soon have to close its doors.

Finally, the tax bill offers little hope for truly growing consumer demand at the local level, which is the recipe for growing local businesses. Any tax benefits for the middle and lower income citizens, the ones who buy from small businesses, are minor and temporary. Then in 2025 when the individual tax cuts end, tax experts tell us that all Americans but the wealthiest will pay more in taxes than they would have had there been no tax “reform” at all, thus hurting consumer demand.

Clearly small businesses, routinely called the backbone of our economy that created two-thirds of all new jobs since the Great Recession, deserved better from Congress and the president. In a poll by Businesses for Responsible Tax Reform prior to the passage of the bill, a majority of small businesses opposed the tax plans, believed that they favored large corporations and did not support the subsequent increase in the national debt. Now that the bill is law, small businesses know that they were correct in their contempt.

Frank Knapp Jr. is co-chairman of Businesses for Responsible Tax Reform and president and chief executive officer of the South Carolina Small Business Chamber of Commerce.

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