PROTECTING SMALL BUSINESS, PROMOTING ENTREPRENEURSHIP

Contrary to Claims by White House, Biden Tax Increase Would Hit Small to Mid- Size Businesses Hard  

By at 24 May, 2021, 10:40 am

“For every large business facing a potential tax increase, there would be at least 105 small to mid-size businesses that would face higher taxes.”

by RAYMOND KEATING-

President Joe Biden has proposed a series of tax increases that will negatively affect entrepreneurs and small businesses. The White House appears to be working hard to counter this straightforward economic reality.

Consider a recent Reuters report that served up the Biden administration’s line so well that it read as if it were written by the White House press office. Among the key points served up by Reuters, based apparently only on an interview with one administration official, were that “Less than 3% of the roughly 30 million small-business owners in the United States could face tax increases under President Joe Biden’s jobs and infrastructure plan,” and “The White House has been seeking to leverage the support and political popularity of small-business owners in its fight to raise the corporate tax rate from 21% to 28% on large corporations such as Walmart Inc and Amazon.com Inc.”

In addition, it was stated:

“The proposed increase in the corporate tax rate to 28% would not affect any small business that file taxes as a ‘passthrough entity’ such as a limited liability corporation, said a senior administration official. Nearly all small businesses fall in that category, the official said.”

And based on the income levels for the increased personal income tax applied to passthroughs, the official said that less than 3 percent would be affected. For good measure, Reuters wrote, “Biden’s tax plan attempts to ‘level the playing field’ between small businesses and large multinational corporations…”

Golly. What’s everybody all upset about then? Well, it turns out that the White House line on the president’s tax increases is misleading.

What if we take the White House assertion that only 3 percent of 30 million small businesses could face higher taxes? Of course, that would be some 900,000 small businesses.

Why would it possibly be a good idea to jack up taxes on nearly a million small businesses? For that matter, why does it make any sense to raise taxes on large businesses either?

But let’s take a closer look at the numbers and the small business impact.

First, the White House is simply ignoring the fact that most C corporations are small businesses. The Small Business Administration defines small businesses as having fewer than 500 employees. It turns out that 99.89 percent of employer corporations (based on the latest Census Bureau data) have fewer than 500 employees. That’s 933,000 businesses facing a tax increase.

Second, what about nonemployer corporations? There are (again, based on the latest Census Bureau data) another 379,000 of those businesses that would face a tax increase.

Third, if we accept the White House’s assertion that 2.6 percent of passthrough small businesses would directly face a tax increase, that’s about 790,000 businesses.

So, based on these numbers, at least 2.1 million small businesses would be facing higher taxes, directly, under the Biden plan.

By the way, when considering that there are only 20,000 large business (with 500 or more employees) in the U.S., that means the ratio of small to large businesses being directly impacted by the Biden tax increases would be 105 to 1.

That is, for every large business facing a potential tax increase, there would be at least 105 small to mid-size businesses that would face higher taxes.

But there’s more.

The Insidious and Direct Impact of Hiking the Capital Gains Tax

For example, President Biden is proposing a massive tax increase on capital gains. The individual capital gains tax rate would increase from 20 percent to 39.6 percent – in effect, doubling the tax rate – on those earning more than $1 million. However, the ObamaCare 3.8 percent tax brings the current capital gains tax up from 20 percent to 23.8 percent, and would result in a top Biden capital gains tax rate registering 43.4 percent. Factor in state taxes, and a total capital gains tax rate would top 50 percent in assorted states. Add in inflation, as capital gains are not indexed, and the real capital gains tax rate would be driven even higher.

The capital gains tax is a direct levy on the returns on entrepreneurship for both entrepreneurs and those who invest in entrepreneurial ventures. And make no mistake, it is high-income earners who have the resources to make such investments.

Starting up, building and investing in businesses are crucial economic undertakings that are fraught with risk and uncertainty. By reducing potential returns, higher capital gains taxes serve as clear disincentives for such critical economic activity. That’s a very real blow to small business activity.

Factoring in the proposed capital gains tax increase, the potential negatives expand notably for entrepreneurial activity. In the end, millions of entrepreneurs and small businesses would be negatively affected – directly and indirectly – by the Biden tax increases.

The Negatives of Biden’s Tax Hikes Will Stretch Far and Wide

So, it turns out that while the Biden administration is trying to portray its tax increases as being focused on big business and the wealthy (still not a good idea), the reality is that the negatives will be felt far and wide across the economy, especially by small businesses.

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

 

 

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