In September, Congress will be back in session. A long policy to-do list awaits. But our legislators shouldn’t be mistaken: Cutting taxes is the priority.
Today, at a pivotal moment in our long economic recovery from the Great Recession, the time has come once again for Congress to embrace the wisdom of a well-targeted tax cut. While opportunities and risks abound for comprehensive legislation, lawmakers should start off right with tax relief for small businesses. Once that priority is established and acted upon, more reforms can follow.
My experience with tax policy goes back to the days of John Engler’s term as governor of Michigan, under whom I was proud to serve as deputy state treasurer for taxation and economic policy. Strong principles and sound math never change, but in decades past, Republicans have at times sacrificed potentially powerful up-front gains for grand bargains on comprehensive “reform” that never materialized. The case for small-business tax cuts is so compelling that lawmakers should avoid swinging for the fences on dubious omnibus bills that are difficult to pass and implement.
The stakes are high. In Michigan, small firms account for about nine in 10 exports and one in two employees, which mirrors percentages nationwide. But small- business owners are historically overtaxed. The overwhelming majority of America’s 29 million small businesses (95 percent) are pass-through businesses. This means that their income “passes through” to the small-business owners to be taxed under the individual income tax structure. The owner of a pass-through business pays taxes at his or her highest marginal individual rate, which can reach 40 percent at the federal level. When you factor in Michigan’s state and local taxes, the tax rate can climb to 50 percent of business income.
Imagine you’re a small-business owner and Uncle Sam takes half of your income. That leaves dismally limited resources not only to make money long-term but also to pay off overhead costs, to expand business operations and to hire more employees while paying existing workers decent wages.
President Trump’s plan to slash the pass-through tax rate to 15 percent provides tax relief for a reason. Job creation and economic growth are impossible when small- business owners — who are responsible for two-thirds of all new U.S. jobs — are taxed at 50 percent rates.
Removing at least some of the tax burden would unleash economic prosperity. In recent polling released by the Job Creators Network, most small-business owners claimed that they would use money from a tax cut to increase wages and add employees, equipment or new locations. Half of the poll’s respondents said the tax cut would help them more than another proposed policy. This would, by extension, help the employees who stand to gain from higher wages and more career opportunities.
Once Congress joins with the White House to cut small-business taxes, then it can move on to other action items and more comprehensive reforms. This includes a simplification of the U.S. tax code, which carries a complex filing process.
According to the Small Business Administration, tax filing costs millions of small businesses at least $10,000, with more than two-thirds having to shell out income on outside tax help. Main Street should be investing in jobs, not tax lawyers.
Congress, the blueprint is simple: Help small businesses and watch hardworking Americans reap the benefits.