Small business 101

Writes one Lowell Simon of Seven Lakes, NC, in a letter published by The Pilot in its Dec. 10 editions, “Can someone please point me to a third-party source that says the GOP tax plan will help small businesses?”

Our gut reaction is to answer his question with one of our own. Can someone please identify a third-party source that says a GOP tax reform bill will hurt small businesses, or for that matter, corporations or individual taxpayers? One third-party who explained this concisely came quickly to mind. He had this to say about cutting federal taxes, in general:

An economy hampered by restrictive tax rates will never produce enough revenues to balance our budget — just as it will never produce enough jobs or enough profits. Surely the lesson of the last decade is that budget deficits are not caused by wild-eyed spenders but by slow economic growth and periodic recessions.

This third-party message was delivered in December 1962 by President John F. Kennedy. The Democrat Party JFK was affiliated with was so dramatically more centrist than today’s far-left Democrat Party, surely we now can accurately identify JFK as a third-party voice.

Mr. Simon might agree or disagree with this premise, but we’re fairly certain as to what he’d ask next. “What does this philosophical viewpoint have to do with tax reform helping small businesses entering 2018?” Answer: It has everything to do with an improved economic outlook for small business owners, employees and customers, which is what the pending tax reform bill being debated by Congressional Republicans will accomplish over time.

Small business owners are essentially self-employed individuals. Their income is not taxed as if they are an entity, such as a corporation. Their profit is their income and is taxed at individual rates, known as pass-through taxation, within their household federal tax return. Unlike an independent contractor (such as a lawyer or tax advisor), small business owners contemplate their after-tax income more broadly. If it’s a start-up small business, the owner often contemplates allocating some of his income back to the business. Perhaps a new piece of equipment is needed. Perhaps he wants to launch a radio ad campaign to raise awareness of the new business. Most small business owners do not think of a tax break as the government “lining their pockets”.

So, back to the question, how do the GOP tax reform bills (one passed by the House; the other passed by the Senate) help small businesses? Without getting into the weeds of when or if a small business owner qualifies for pass-through taxation (assume the mom-and-pop businesses and franchised stores you frequent in your community do), here is a third-party overview by the Director of Investment Planning for The Motley Fool, Dan Caplinger:

The Senate decided to give small businesses a tax break by offering their owners a deduction on a portion of the income that passes through to their individual tax returns. Under the final proposal, qualifying business owners will be able to deduct 23% of their pass-through income on their tax returns, subject to a limit of 50% of wage income in order to prevent potential abuse.

Rather than offering a deduction, the House suggested changing the tax rate that applied to the business income that pass-through businesses generated. A maximum tax rate of 25% would have applied to pass-through income, but limitations would have treated 70% of income as wages at the full ordinary tax rate unless a business could prove that a different percentage was appropriate. An even lower rate of 9% would apply to businesses earnings less than $75,000. Professional services companies, such as those operated by lawyers and accountants, would have been excluded from the preferential rate entirely.

It is obvious, to some, that either approach would be a welcome benefit to the small business owner, who heretofore might have seen his total household income (business income plus, as an example, a spouse’s income as a school teacher) taxed at 35%.

We mention that help being contemplated for small businesses is obvious to some because yet another third-party report on the subject, by the polling agency SurveyMonkey, finds that small business owners who identify as Democrats dispute the merits of the tax reform bills:

For those small-business owners who identify as Republicans or who lean toward the GOP, tax reform couldn’t come soon enough. A huge majority (85 percent) supports the passage of the tax reform. These data come from the newest CNBC/SurveyMonkey Small Business Survey, conducted Nov. 20–Dec. 4 among 2,043 small-business owners.

Democratic-siding small-business owners take a harder line. Eight in 10 (80 percent) oppose the tax reform proposals, and they do not mince words when asked about their thoughts. “Unfair” is the most frequently mentioned single-word response, but “rich” and “wealthy” come up frequently in longer responses, as in, “It’s not a reform, it’s a tax cut for the wealthy.”

The ideological polarization that defines 21st Century America apparently is so entrenched that even some small business owners would forgo tax relief in order to stop “big (evil) corporations” from seeing relief from burdensome taxation as well.

So misguided is this logic that we must harken back to the words of American economist Walter E. Williams, cited by this blog in October. Wrote Williams, explaining the crippling impact of our nation’s 38.91% tax on corporate earnings (proposed to be reduced to 20% by both pending bills):

If a tax is levied on a corporation, it will have one of four responses or some combination thereof. It will raise the price of its product, lower dividends, cut salaries, or lay off workers. In each case, a flesh-and-blood person bears the tax burden.