PROTECTING SMALL BUSINESS, PROMOTING ENTREPRENEURSHIP

Biden-omics Fantasy: Increasing Taxes on Business is Good for Small Business

By at 19 August, 2021, 6:53 pm

by Raymond J. Keating –

The Biden administration apparently is confused as to how public policy impacts business and the economy.

For example, there was the President’s executive order in July that tried to assert that more regulation of business would lead to more competition in the marketplace. That didn’t make any sense (see SBE Council’s analysis here).

And now a new “Fact Sheet” from the administration, released on August 19, tries to assert that tax increases on businesses, including on small businesses, is good for small business. This “Fact Sheet” is filled with rehashed, misleading information that tries to make it seem like President Biden’s proposed tax increases won’t touch small business, and somehow or another, actually would be good for small business. For example, the assertions include:

● “According to a new Treasury Department analysis, the President’s Agenda will protect 97 percent of small business owners from income tax rate increases, while delivering tax cuts to more than 3.9 million entrepreneurs.”

● “President Biden’s proposal to restore the corporate tax rate halfway back to its pre-2018 level would not affect any small businesses that file taxes as a passthrough entity (LLCs, S-corps, and sole proprietorships). That’s nearly every small business in America.”

● President Biden’s proposal to increase the top personal income tax rate “would affect less than 3 percent of small business owners.”

Sounds great, right? Well, no, it doesn’t.

Tax increases always rank as economic negatives, but that’s especially the case during tough economic times, as we currently face. And that includes President Biden’s plans for tax increases on business, including jacking up the corporate income tax rate from 20 percent to 28 percent, as well as pushing for a global minimum tax.

When the administration first spun this idea that these tax increases would be good for small business, SBE Council responded with an analysis in May of this year clearly showing the contrary. Consider:

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.

And of course, there is more.

For example, the “Fact Sheet” ignores that President Biden and Members of Congress have proposed a near doubling of the top federal capital gains tax rate – from a total of 23.8 percent to 43.4 percent – as well as eliminating the step-up basis in gains at death. Given that the capital gains tax is a direct tax on entrepreneurship and investment, it reduces resources and incentives for starting up, building and investing in small businesses. Factor in the fact that the capital gains tax is not indexed for inflation and most states pile on with their own capital gains levies, and the Biden capital gains agenda becomes highly destructive to entrepreneurs and small businesses.

(See how the elimination of step-up in basis and higher capital gains taxes impact small businesses in our latest poll here.)

In addition, increasing personal income tax rates on upper-income earners doesn’t simply affect those earners, but also the fact that many of those individuals are, again, business owners, as well as being those with the accumulated wealth to make investments in new and expanding small businesses. (See SBE Council’s briefs on increasing personal income and capital gains taxes here, here, and here.)

For good measure, as SBE Council has explained, there’s nothing positive for the economy and small business by pushing a global minimum tax. As we’ve noted: “Make no mistake, any global tax accord that seeks to set minimum tax rates and impose higher taxes on certain businesses – as opposed to free trade agreements that work to reduce taxes (i.e., tariffs) and other governmental burdens – works against economic growth.”

Also, it pays to keep in mind that even when talking about the aspects of the Biden tax agenda that does raise taxes on large businesses, there’s nothing positive to come from that for small business. SBE Council’s point on the global minimum tax agenda holds for other tax increases as well:

In the end, limiting tax competitiveness and hiking costs directly on large U.S. businesses – such as leading technology firms – will be a negative for the overall economy, and that includes for small businesses. Consider that, for example, raising costs on large technology firms will negatively affect those businesses, and therefore the small and mid-size businesses (SMBs) that are not just customers of those large businesses but also partners with them, that is, they grow and profit from using platforms like Amazon, Facebook and Google.

But what about the 3.9 million entrepreneurs who will get a tax cut under the Biden plan?

The White House “Fact Sheet” talks about providing tax credits for those purchasing health insurance coverage via HealthCare.gov and expanding the child care tax credit. That’s it.

Of course, the child care tax credit has nothing to do with small business investments or operations. And the HealthCare.gov point raises myriad questions regarding taxpayer costs for ObamaCare, with an obvious point that many of the ObamaCare tax increases certainly hit entrepreneurs and small businesses, including the added ObamaCare 3.8 percent tax on capital gains. So, these two points about tax cuts, are, to say the least, a stretch.

Even in politics, trying to assert that increased taxes on businesses, including on millions of small businesses, is good for small business is like saying up is down, two plus two equals three, and the sun rises in the west and sets in the east. It’s simply ridiculous on its face. It’s a bizarre fantasy that no one should take seriously.

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

 

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