The Small Business and Entrepreneurship Council (SBE Council) recently shared an update on smaller firms and their concerns regarding policies that impact these businesses. The SBE Council reports that smaller firms are worried about the looming expiration of the Tax Cuts and Jobs Act (TCJA) – the tax changes instituted during the Trump administration. These tax improvements are set to expire at the end of 2025.
While there has been plenty of partisan bloviation regarding the legislation, both large and small firms benefited from the legislation, boosting economic activity. Regarding corporate taxes in general, the TCJA took corporate rates from one of the highest out of all OECD member states to the middle of the pack – globally. While some would like to see corporate taxes go lower, clearly, TCJA improved the competitiveness of operating a business in the US in a very competitive world.
As for the SBE Council’s Small Business Check-Up Survey, taken in August, polled businesses share the following worries about higher taxes and the obvious uncertainty.
The following are the top concerns:
- inflation (75%)
- high taxes and tax complexity (65%)
- higher interest rates (65%)
- slower sales (62%)
- gasoline prices (60%)
- energy and transportation costs (57%)
- labor and benefit costs (56%)
- supply chain disruptions (53%)
- labor shortages (52%)
SBE Council Chief Economist Ray Keating highlights that differences in policy for the two Presidential candidates. Vice President Kamala Harris wants to raise corporate taxes to 28% from the current 21%, while opponent former President Donald Trump wants to drop them to 15%.
Keating states:
“Why do Vice President Kamala Harris and assorted Members of Congress want to jack up the federal corporate income tax rate from 21 percent to 28 percent?… Advocates for higher taxes like to portray an increase in the corporate tax rate as only affecting big businesses. While hiking taxes on large businesses is a bad idea in and of itself, this assertion turns out to be dead wrong as the overwhelming majority of C corporations actually are small businesses.
Based on the latest U.S. Census Bureau data covering 2021, there were 918,045 C corporation employer firms in the U.S., as well as 410,936 non-employer C corporations. That tallies up to 1,328,981 C corporations…If we limit ourselves to just C corp employer firms, for example, 85.6 percent have fewer than 20 employees, 96.2 percent fewer than 100 workers, and 98.9 percent fewer than 500 employees.”
Keating advocates on behalf of firms, stating that the government should not seek to raise corporate rates.
“Instead, the agenda should be about further reducing corporate taxes. That’s not a race to the bottom, as critics of such tax cuts assert, but instead, as I’ve argued before, it’s a race toward creating a pro-growth tax system in which every nation that participates winds up winning.”
As some smaller firms are taxed at the individual level (IE LLCs – Sub S corporations), raising individual rates could also have a detrimental impact on the economy. Harris has stated she would not tax anyone earning less than $400,000 but this shows a lack of understanding of taxes as this would mean many smaller firms would shoulder a greater burden.
Regarding Capital Gains taxes, another hot tax topic, Keating explains that Vice President Harris aims to increase top individual capital gains from 23.8 percent (20 percent plus the 3.8 percent Medicare tax, or net investment income tax) to 33 percent (28 percent plus a 5 percent Medicare tax). Keating says this will be “highly destructive” for entrepreneurship and capital formation.
“Oddly, the Harris campaign seems to be trying to take credit for not proposing to increase the capital gains tax as much as President Biden – i.e., the Biden-Harris administration – has. That is, to 44.6 percent (increasing the capital gains tax to 39.6 percent plus a 5 percent Medicare tax). In the end, the Harris 33 percent rate would be the highest capital gains tax since the 1970s,” adds Keating.
Ensuring someone or something pays their fair share is an obtuse argument as it never defines how much is a fair share. Is it 100%? 90% At what point is it fair. What is clear is entrepreneurs and smaller firms will be harmed by higher taxes, and this means a negative impact to the economy.