Even as America is poised to celebrate the passage of historic comprehensive tax reform to lower rates, simplify regulations, promote growth and spur job creation, missing from much of the public debate has been an in-depth examination of the benefits to entrepreneurs and the 28 million small businesses across the nation. They are legion, instrumental in relieving the current fiscal burdens on both taxpayers and the economy, and are well worth a closer look.
Few support the status quo with our federal tax code. In the 31 years since Congress last reformed the code, it has blossomed into a behemoth of monstrous proportions. At more than 2.4 million words and 70,000 pages, it requires an entire industry of lawyers and accountants just to navigate its labyrinth of provisions. It’s why mere compliance with the federal income tax each year costs the U.S. economy more than $233.8 billion in productivity.
Of course, well beyond the compliance quagmire, individual Americans are subject to confiscatory rates. So, too, are the businesses that employ them. While the top average corporate rate of 39 percent (combined state and federal) is among the highest in the world, small businesses in America fare no better.
That’s because the majority of them operate as “pass-throughs,” or “S-Corps.” This means their owners – often individuals – pay their business’s income taxes on their personal returns, usually subject to the top rate of 40 percent. The result has been small-business owners reluctant to increase their business investment, hire new employees or raise the salaries of their existing staff.
These antiquated federal rates and their regulatory regime have only served to prolong the economic misery of the 2008 recession. Our growth has been slow, our competitiveness on the world stage has been handicapped, and entrepreneurship and investment in small-business startups have been depressed.
In fact, just last year, the Small Business and Entrepreneurship Council calculated that more than 3.7 million businesses are missing here in the United States. Sluggish economic growth and massive unemployment rates have reigned.
Fortunately, economic salvation is on the way as House and Senate Republicans will pass the Tax Cuts and Jobs Act this week. The comprehensive reforms announced will alleviate current burdens and allow the U.S. economic engine to fire on all cylinders, emitting sustainable growth and jobs for the benefit of all Americans.
A reduction in the corporate rate to 21 percent will free up capital to boost wages and grow the American workforce, while once again establishing the United States as a global competitor. The same boost will occur with the near-halving of the small-business tax rate to 25 percent.
Add to that the newly established 20 percent small-business income deduction – where in practice a business with $200,000 of taxable income would only be paying taxes on $160,000, leaving $40,000 essentially tax-free – and the expansion of Section 179, allowing small businesses to expense more new equipment purchases (to $1 million and increases the phase-out threshold amount to $2.5 million).
Small-business owners will utilize these additional revenues to invest back into their companies, increasing wages, establishing improved workplace environments and, of course, creating more jobs.
For too long, the United States has been burdened with a complex and confusing tax code that stifles innovation, discourages growth and hampers the success of the employers that people rely upon for their livelihood. Comprehensive tax reform is necessary to propel our economy forward, to provide relief and cash in the pockets for low- and middle-income Americans, and to allow small businesses to once again flourish.
I applaud Congress for seizing this once-in-a-lifetime opportunity to fix the broken tax code, bringing millions of jobs back to the United States and saving individuals, families and businesses from billions in tax and filing costs. There is no doubt that growth, jobs and prosperity will ensue after comprehensive tax reform is passed and signed into law by President Donald Trump.
David Williams is the president of the Taxpayers Protection Alliance.
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