The Trump Tax Plan: A Boost for Entrepreneurship, Small Business and the Economy

By at 11 November, 2016, 9:42 am


by Raymond J. Keating-

The U.S. economy has performed poorly over the past decade – suffering through a long, deep recession and a sluggish, at best, recovery/expansion period – largely due to a hostile federal policy climate. That has included anti-growth tax policies, which, according to President-elect Trump’s agenda, should change markedly during his administration.

Gap Analyses on the Economy

The big ills of our economy were laid out in a series of reports from SBE Council over the past few months. The reports and key points in SBE Council’s series of “Gap Analysis” are the following:

Gap Analysis #1: The GDP Shortfall – estimated a GDP shortfall of $2.7 trillion (in 2009 dollars) in 2016 thanks to real GDP growth running at less than half the rate it should during a recovery/expansion period. (In addition, a look at the latest GDP numbers for the third quarter can be reviewed here.)

Gap Analysis #2: Lost Decade of Private Investment – reported a historic gap or shortfall in private-sector investment over the most recent decade, for example, with real fixed nonresidential investment (or business investment) coming up $1.1 trillion (in 2009 dollars) short of where it should be in 2016.

Gap Analysis #3: Entrepreneurship in Decline: Millions of Missing Businesses – pointed to an estimated gap or shortfall of between 867,000 and 4.8 million businesses in the U.S. economy. (Part of this analysis is updated here.)

“Gap Analysis #4: The Productivity Shortfall: Causes and Results” – noted the dramatic slowdown in productivity growth in recent years, with annual labor productivity growth averaging a woeful 0.4 percent from 2011 to 2016, compared to average annual growth of 2.0 percent from 1956 to 2016.

“Gap Analysis #5: Americans’ Lost Income” – reported that if per capita real personal disposable income grew at the average historic rate since 2009, real per capita personal disposable income in 2015 would have been $2,000 higher (2009 dollars) on average for individuals, and $8,000 higher for an average family of four.

Gap Analysis #6: America’s Lost Jobs – showed dramatic shortfalls in the U.S. labor force and in job creation, in particular, noting that the U.S. effectively is suffering from a shortfall of 8.1 million jobs.

Gap Analysis #7: Lost Exports, Lost Small Businesses – showed dramatic gaps in U.S. exports, registering a shortfall as large as $635 billion in 2016, and big declines in the number of U.S. exporting firms, including 49,800 missing small exporting firms with fewer than 100 workers.

Trump’s Tax Policy

Again, a key part of the ills negatively affecting the economy has been tax policy, both what’s been imposed, such as the 2013 tax increase and the ObamaCare tax hikes, and what’s been threatened by the Obama administration, such as proposed higher taxes on domestic energy producers in each Obama budget plan, discussion of a carbon tax, and looming future tax increases tied to rising federal government expenditures due to, in part, ObamaCare and increasing federal government debt.

The agenda presented by Mr. Trump during the campaign shifts tax policy in a very different direction. The key points in the Trump plan are as follows:

• Collapses seven personal income tax brackets ranging from 10% to 39.6% into three brackets of 12%, 25% and 33%. The standard deduction is increased for joint filers to $30,000 and $15,000 for single filers. The individual AMT would be repealed.

• On corporate and business taxes, as noted in the Trump plan, “The Trump Plan will lower the business tax rate from 35 percent to 15 percent, and eliminate the corporate alternative minimum tax. This rate is available to all businesses, both small and large, that want to retain the profits within the business. It will provide a deemed repatriation of corporate profits held offshore at a one-time tax rate of 10 percent… Firms engaged in manufacturing in the US may elect to expense capital investment and lose the deductibility of corporate interest expense.”

• Full expensing of all new business investments.  Most business tax credits and special provisions are repealed, with the exception of the research and development (R&D) tax credit.

• The death tax will be repealed, but capital gains at death over $10 million will be taxed.  Small businesses and family farms will be exempt from this capital gains provision.

• The top rate 20% capital gains tax would be left unchanged, but it would be 15% for the 25% bracket and zero for the 12% bracket. Carried interest would be taxed as ordinary income (thereby raising the tax rate from 20% to 33%). However, the ObamaCare 3.8% tax would repealed only as it applies to investment income, thereby, for example, reducing the effective capital gains tax rate from 23.8% to 20%.

The Trump tax plan is an excellent starting point. At the same time, there are several questions that must be clarified. For example, it is still unclear if non-incorporated business, which account for 95 percent of total U.S. businesses, would pay the 15% rate.  For good measure, leaving the capital gains tax rate at its current level is disappointing, as it fails to further incentivize entrepreneurship and investing, which is critical for business creation, economic growth and job creation.

In SBE Council’s new report – Gap Analysis 8: Policy Solutions for Closing the Gaps in Our Economy: Proven Models and Actions from Past Administrations – tax changes based on policies from past presidential administrations offer more comprehensive, pro-growth, pro-entrepreneur measures of tax relief and reform that hopefully can be integrated with measures in the Trump plan. SBE Council’s plan proposes that tax reform and relief should center on: 1) a two-rate personal income tax with a top total rate of 25 percent; 2) a capital gains tax of 15 percent, or even better, 0 percent; 3) no death tax; 4) a corporate income tax rate of 25 percent, and 5) expensing as an option for all businesses. Of course, small businesses want vast simplification of the system and that needs to be a key goal in tax reform.

The Trump tax plan represents a vast improvement over the current tax code and what’s been emphasized too long on the policy front, and serves as a good start for much-needed tax relief and reform that would boost entrepreneurship, investment, business development and economic growth.


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.


News and Media Releases