How Tax Reform Will Help Small Business Grow and Create Jobs

By at 13 July, 2017, 8:35 am

How Tax Reform Will Help Small Business Grow and Create Jobs


Written Statement for the Record

Karen Kerrigan

President & CEO

Small Business & Entrepreneurship Council


Committee on Ways and Means

Tax Policy Subcommittee

U.S. House of Representatives

The Honorable Peter Roskam, Chairman


Statement submitted on:

July 13, 2017

Chairman Roskam, thank you for your leadership, commitment to tax reform, and for your consistent support of entrepreneurs and small businesses.

On behalf of the Small Business & Entrepreneurship Council (SBE Council) and our nationwide membership and network of more than 100,000 members, I am pleased to submit this statement for the record on how tax reform will help small businesses grow and create jobs. Pro-growth tax reform is essential to the growth and competitiveness of the U.S. economy.  It is essential that proposals and measures being considered keep the needs of small businesses and entrepreneurs at the center of reform.  As you know, small businesses are critical to job creation, innovation and the dynamism in our economy.  Our nation needs a tax code that enables small business sustainability and growth.

SBE Council is a nonpartisan, nonprofit advocacy, research and education organization dedicated to protecting small business and promoting entrepreneurship. For nearly 25 years SBE Council has worked to advance a range of policy and private sector initiatives to strengthen the ecosystem for startups and small business growth.  Tax system reform is one of our core issues, and a priority issue for small business owners and entrepreneurs.

As the Ways and Means Committee has explored in many hearings, the current tax system is costly and complex. Transforming the system to one that is simple and fair, while allowing business owners to keep more of their earnings, will translate into major gains for our economy including quality job growth.  Entrepreneurs plow the bulk of their profits back into their businesses in order to operate more competitively and to reward and retain their workforce. The American dream will be reinvigorated and restored for these entrepreneurs and their dedicated employees if these businesses are able to keep and invest more of their hard-earned resources.

Tax reform is vital to the growth of U.S. small businesses and entrepreneurship.  Again, the focus of this effort must be on reforms that produce a simple, fair, and productive tax code – one that encourages investment, risk-taking, capital formation, and growth. Indeed, America’s small businesses have experienced a challenging operating environment for more than a decade. The financial crises, the Great Recession, followed by the weak economic recovery and policy headwinds from Washington, have increased their business costs and fueled a long period of uncertainty.

For 2017, the direction of policy has obviously changed and small business owners are feeling more optimistic about the policy environment.  Our members are pleased that Washington is currently in a period where there is an opportunity to advance policies that create a better U.S. business environment and make our nation more competitive.

Tax Reform Must Encourage Higher Levels of Entrepreneurship

The U.S. tax code needs to encourage small businesses to invest and grow, but it also needs to foster higher levels of new business creation.  The dearth in entrepreneurship is a crisis that needs to be addressed on several levels, but sound policies – including tax reform – play a key role.

SBE Council’s most recent “Gap Analysis” report on entrepreneurship finds a massive shortfall of businesses – some 3.4 million “missing” businesses, compared to where we should be based on historical trends and key data related to incorporated and unincorporated self-employed, and employer firms as shares of the relevant population. SBE Council believes a pro-growth tax system is a critical part of the policy ecosystem that will enable greater levels of entrepreneurship.

In addition to lowering tax rates on all businesses and simplifying the system, tax writers need to consider changes to other parts of the tax code to bring it into the 21st Century.  Several thresholds established in the early 1950s have not been updated, and stifle the creation of micro-businesses and early-stage entrepreneurs.  For example, the threshold on self-employment taxes kicks in at $400, which is 15.3 percent of profits, but has never been updated.  However, the standard deduction on federal income tax is adjusted annually. If the self-employment tax floor had been adjusted at the same rate as the standard deduction, it would be more than $6,000.  Also, the 1099-MISC reporting threshold (currently at $600) would be $5,376 if adjusted in today’s dollars.  Updating both of these thresholds would give the self-employed and early-stage entrepreneurs a better chance for growth.  Lifting these barriers would also encourage more people to start businesses.

It would be wise for tax writers to review all thresholds, as well as quarterly reporting dates, to make them more consistent, current, and logical.

A Globally Competitive Tax System is Critical for Small Business Growth and Success

Based in part on tax reform plans that the GOP House leadership and Trump Administration have put forward to date, the foundation for substantive, productive tax reform has been established. The key now is to move forward with measures that unify the business community and entrepreneurs, such as greatly reducing tax rates, allowing expensing of capital expenditures for all businesses, simplifying the tax system, eliminating the AMT and death taxes, and eliminating special-purpose “loopholes,” among other measures.

Lower Tax Rates Critical to Entrepreneurs

SBE Council supports reducing both the corporate income tax rate, and the tax rate of pass-through entities. This is vital for U.S. business competitiveness and economic growth.

As you well know, the U.S. imposes one of the highest corporate tax rates on the planet.  Reducing and reforming the corporate income tax rate is not just a “big business” issue. It’s very much about small business. According to the latest Census Bureau data, 86 percent of corporations have less than 20 employees, and 96.7 percent less than 100 workers.  Many of these small businesses are in high-growth sectors, and they – as well as their employees and our economy – would benefit tremendously from reducing the corporate rate.

At the same time, it must be recognized that 95 percent of businesses as non-C corporations pay the personal rather than the corporate income tax, which speaks to the need to reduce individual income tax rates as well.  Just as the U.S. corporate income tax rate ranks poorly, our individual rates are not globally competitive.

As for top personal income tax rates, the 39.6 percent tax rate ranks 106th among 144 nations this year.  The news gets worse when factoring in the average state income tax rate (excluding local income tax rates but accounting for the deductibility of state income taxes on federal returns). This adds at least three percentage points to the U.S. rate, taking it up to at least 42.6 percent. That, in turn, pushes the U.S. tax rate global ranking down further to 115th out of 144 nations.

Small business optimism increased markedly following the 2016 elections and it remains strong in the second quarter of 2017.  But entrepreneurs and small business owners are counting on substantive tax reform – featuring relief from high tax rates and burdens on investment, onerous regulations, and ridiculous complexity – to help bring them to higher levels of growth and confidence. In turn, this will lead to more investment, quality job creation, innovation, and business expansion. With higher levels of growth (and more opportunity), the U.S. will also experience enhanced business startups, which means more dynamism, innovation and quality job creation for our economy.

SBE Council’s hope is that the House and Senate accelerate the pace of tax reform, so that small business owners and entrepreneurs can plan for a better tax system in 2018.  Again, lowering rates for all, vastly simplifying the system, making the system fair and productive to encourage growth is vital to U.S. competitiveness and leadership in the global economy.  With this in mind, we are hopeful your committee will continue to keep entrepreneurs and small businesses at the center of your reform efforts.  SBE Council and our members pledge to work with you every step of the way to ensure the U.S. has a modern, pro-growth tax system that does not stand in the way of opportunity and entrepreneurship in America.

Thank you for considering the views of SBE Council and our members.

Respectfully submitted,

Karen Kerrigan, President & CEO

Small Business & Entrepreneurship Council

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