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Small Business Open Letter to Senate and House Leadership on Tax Reform

Dear Chairman Hatch, Ranking Member Wyden, Chairman Brady, and Ranking Member Neal:

On behalf of the Small Business & Entrepreneurship Council (SBE Council), small businesses and entrepreneurs across the country urge Congress to prioritize the passage of permanent, comprehensive tax reform this year. Fixing our broken tax code, which has not been meaningfully reformed in more than thirty years, is critical to helping small businesses and unleashing the entrepreneurial potential of our nation.

The need for comprehensive tax reform is evidenced by years of sluggish economic performance and tepid capital investment. A report authored by SBE Council Chief Economist Raymond J. Keating in November of 2016 referred to a “lost decade of private investment” in which U.S. business investment has come up over a trillion dollars short of where it should be. Clearly the U.S. can do better, which is why we recommend the following three reforms:

First, we must reduce tax rates for businesses. At 35 percent, the U.S. corporate tax rate is among the highest in the world. The plans offered by both President Donald Trump and by Speaker Paul Ryan and House Ways and Means Chairman Kevin Brady lay a foundation for substantive, productive tax reform, starting with historically deep reductions in the corporate tax rate. Slashing the corporate tax rate will help businesses of all sizes, as more than 86 percent of C corporations today have fewer than 20 employees, and 96.7 percent have less than 100. Those plans provide relief for U.S. small businesses by establishing the lowest tax rate since World War II. This is critically important to the growth and competitiveness of these entrepreneurial firms.

Second, it is important to understand that entrepreneurs and businesses are affected heavily by individual income tax rates. Roughly 95 percent of U.S. businesses are non-C corporations that pay the personal, rather than the corporate, income tax. For these business owners, the tax code’s highest personal income tax rate, at 39.6 percent, is a massive drain on wealth and an obstacle to growth. A business tax rate that achieves parity with the corporate rate is critically important, which would allow small business owners and their employees to keep more of their earnings, adding dynamism, innovation and quality job creation to our economy. At a minimum, a tax reform solution should revert to the Reagan-era tax rate of 28 percent for all individuals. More ideally, the rate should be lowered to 25 percent, as the SBE Council has proposed previously.

Third, broader, permanent reform is needed. Lawmakers should recognize that simply cutting taxes for America’s 28 million small businesses, as well as individuals, will not be enough to reach the full potential of our economy.  We are fully supportive of proposals that allow for the full and immediate expensing of capital expenses. By allowing businesses large and small to immediately deduct the full cost of their capital investments, rather than over the course of several years, this fundamental reform would spur business spending and lead to higher levels of investment, quality job creation, and growth across all sectors.

Whether it is sweeping tax cuts or full and immediate deductibility of capital investments, each critical portion of tax reform that has gained momentum in recent months is geared toward making the tax code grow our economy, rather than restrict it. The reform areas we have specified here also build upon efforts by previous administrations on both sides of the aisle, including the Clinton and George W. Bush Administrations, to use the tax code in a way that gives entrepreneurs what they need: a common sense system with lower rates that encourages business investment and risk-taking. We also add that simplifying the tax system is a key priority for small businesses. Tax reform efforts that keep simplicity and fairness at the core will lead to a tax system that enables the growth of entrepreneurship and our small business sector.

During the 2016 campaign, we heard a great deal about tax reform, and small businesses are counting on a substantive reform in the immediate future. It is essential in the days and weeks ahead that President Trump and leaders in Congress come together in a collaborative effort to make good on this promise.

We believe the best plan on comprehensive tax reform must include a territorial system, full expensing, and a lower rate.  More importantly, comprehensive tax reform must include a bold and balanced plan that works for all of America.  It would be a tremendous mistake to not capitalize on this historic opportunity to make transformative changes to the nation’s tax code to help grow the American economy and small businesses, which will lead to the creation of high-quality jobs for millions of Americans.
Sincerely,

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White House National Economic Council Director Gary Cohn

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