PROTECTING SMALL BUSINESS, PROMOTING ENTREPRENEURSHIP

Tax Cuts 2.0 Needed for Business Certainty and Sustained Economic Growth    

By at 3 August, 2018, 9:29 am

by Raymond J. Keating-

The Tax Cuts and Jobs Act (TCJA) that was passed and signed into law in December 2017 served as a good start in moving our burdensome tax system in a pro-growth, pro-entrepreneur, pro-investment direction. The House Ways and Means Committee is working to keep the ball rolling forward with its Tax Reform 2.0 Framework.

Ways and Means Chairman Kevin Brady (R-TX) offered this encouraging observation: “Every day, businesses wake up and ask themselves ‘how do we become more competitive, innovative, and better?’ That practice has always been foreign to Washington—that ends now. With this framework, we are taking the first step to change the culture in Washington D.C. where tax reform only happens once a generation. We plan to work off this framework to build on the growing successes of the Tax Cuts and Jobs Act and ensure this energized economy continues moving forward.”

The Ways and Means Framework notes the need to make the tax relief for individuals and non-C-Corp small businesses permanent; to expand incentives for savings; and to “help brand-new businesses write off more of their initial start-up costs, and remove barriers to growth.”

Make no mistake, the tax relief provided in the Tax Cuts and Jobs Act, along with regulatory relief that has been advanced since January 2017, have been real plusses for businesses of all sizes and workers. (Read SBE Council president & CEO Karen Kerrigan’s testimony before the House Financial Services Committee that details those benefits.)

For example, in its analysis of real GDP growth hitting 4.1 percent in the second quarter of this year, SBE Council noted the acceleration we’ve experienced in private investment:

“Business investment continued its strong growth for the sixth consecutive quarter, helping to fuel current and future economic growth. Real fixed nonresidential investment grew by 7.3 percent in the second quarter, including 13.3 percent growth in structures investment, 3.9 percent in equipment, and 8.2 percent in intellectual property products. It must be noted that a dramatic change in tone and policy on the tax and regulatory fronts over the past year and a half has been a big plus for business and the incentives for investment.”

In addition, the Tax Foundation has reported, “The Tax Cuts and Jobs Act (TCJA) is projected to add 215,000 full-time equivalent jobs in 2018 alone, and 1,443,000 cumulative full-time equivalent jobs by 2025.” Unfortunately, over the longer run, that net job gains fall to 339,000 due to the expiring provisions in the law. That is, individuals and businesses currently face a stiff tax increase at the end of 2025.

While the reduction in the corporate income tax rate from 35 percent to 21 percent is permanent, other key aspects of the TCJA are not, such as reductions in personal income tax rates; a 20-percent deduction on pass-through income, with assorted limitations, bringing the effective top federal income tax rate on such pass-throughs (i.e., S-Corps, LLCs, partnership and sole proprietorships) down from 39.6 percent to 29.6 percent; and expensing for all businesses (including an increase in Section 179 expensing) of certain investments, such as machinery and equipment, is allowed for five years and then phased down over the following five years.

Making all key aspects of the TCJA permanent, as well as expanding savings vehicles and reducing barriers to starting up and building businesses are critical to continue to provide enhanced incentives for working, saving and investing.

But as Chairman Brady tacitly acknowledged, more is needed.

For example, deeper reductions in personal income tax rates clearly are needed, with the goal of at least getting back to the top Reagan tax rate of 28 percent. And since capital gains taxes are simply added layers and burdens placed on entrepreneurship and investment – the engines of economic growth – the ideal scenario would be eliminating the capital gains tax. Short of that, the capital gains tax rate needs to be reduced – for example, at least back to the George W. Bush rate of 15 percent – with gains indexed for inflation. Finally, expensing should be a permanent option for all business covering all forms of capital investment.

If we’re serious about moving ahead step by step in making the U.S. tax system increasingly pro-growth, then we need to incentivize entrepreneurship and private investment by substantially reducing both tax and regulatory burdens on such undertakings.

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Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.

Keating’s latest book published by SBE Council is titled Unleashing Small Business Through IP:  The Role of Intellectual Property in Driving Entrepreneurship, Innovation and Investment and it is available free on SBE Council’s website here.

 

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