If the Democrats could shelve their tired and weary class warfare rhetoric, they’d realize that a good case can be made against some key parts of the new GOP tax plan. This plan seems to fail to help truly small businesses — the actual mom & pop operations like independent retailers, single franchise owners, stable operators, independent medical practitioners — and instead is designed to benefit “big small” businesses as well as corporations.
I’ve heard these complaints from entrepreneurs whom I’ve known for years — and they are most assuredly pro-Trump, every one of them. But the Law of Unintended Consequences may be at play here. Either that, or the Leftards are sorta correct when they rail on about “breaks for the rich”.
A couple of plausible explanations for these disparities in treatment come to mind. First, realize that Congress considers ALL of our earnings to be THEIRS, and they may have opted to help larger businesses over small ones, because the net result will be a vastly enlarged pool of taxable earnings, no matter what the tax rate. And, despite the ongoing GOP mantra that “small businesses create more jobs than any other economic group”, the fact is that individual members of Congress stand to get bigger re-election campaign contributions from deep-pocketed corporate lobbyists than from outfits like the Council of Independent Small Businesses. So they may have skewed the tax relief to most benefit the people who line Congress’ pockets.
Whatever the reasoning behind the new law’s tax rates, here are some details, from a conservative business publication and also from the totally, totally unbiased folks at NPR and the NY Times. We report, you decide.
An econ professor turned small-business owner breaks down his three big problems with the GOP tax plan … by John Ciolli 21 Dec 2017, Business Insider Online
- Tim Wulf, a Jimmy John’s franchisee, says the Republican tax plan doesn’t help small-business owners.
- Wulf, a former economics professor, says the tax bill lacks measures to boost labor productivity, which he identifies as the most important driver of US economic improvement.
- To that end, Wulf is most concerned with the expensing of equipment, interest on debt, and the tax cut being offered to S-corps and partnerships.
- Wulf is a Republican but says he keeps his politics out of his economic analysis, which includes regular written contributions to trade publications and local outlets.
Tim Wulf, a Jimmy John’s franchisee in Reno, Nevada, was hoping that Republican tax bill would help him pay his employees more. After all, one of the long-running stated missions of tax reform has been to boost wages and improve the standard of living for US workers.
Instead, it looks as if the legislation — which officially passed through Congress on Wednesday — could end up making things even tougher for people like Wulf, an economics professor turned entrepreneur.
A franchisee of multiple Jimmy John’s sandwich shops, Wulf is part of a rapidly growing network of restaurants that prioritize super-fast delivery. For a Jimmy John’s store to receive an order, prepare it using fresh ingredients, and then schlep it to your front door in a tight window of time, it needs both skilled employees and top-of-the-line equipment.
Under the new plan, Wulf doesn’t expect to be able to meaningfully upgrade either of these areas — at least not in the long-term fashion befitting a growing business. And as someone who also serves as the Nevada chapter chair for the National Federation of Independent Business Leadership Council, it troubles him to see how tax reform has played out — not just for his operation but for small businesses as a whole.
There are three areas of the tax bill that have him particularly concerned, with the first two directly affecting the higher wages and machinery upgrades he’s so keen to deliver. They are:
1) Expensing of equipment
On first blush, the portion of the tax bill that will allow businesses to immediately deduct the cost of new equipment for a five-year period is a big improvement on the previous setup, which made them take depreciation and then apply the tax benefit over multiple years.
While Wulf acknowledges the boost this would offer, he wants to see it instated on a permanent basis. That way, owners could invest in their businesses with a clear growth plan in mind — with none of the restrictions that might accompany a finite time horizon.
So how does this relate to wages?
Remember, Wulf is an economics professor — so he explains it that way: It all boils down to making labor more effective, which then translates to better pay. In his mind, investing in technology and machinery are the elements most crucial in boosting overall labor productivity.
By making labor more valuable, we can pay employees more.
“By making labor more valuable, we can pay employees more — and we want to pay them more, we want to keep them,” he said in a recent phone interview. “And in order to be able to do that, they have to be more productive. And for that to happen, they have to have the tools of productivity.”
2) Interest on debt
While the equipment-expensing part of the tax bill at least offers an immediate-term positive, there’s no such silver lining when it comes to the GOP’s plans for interest on debt.
Previously, interest counted as a business expense. But under the new tax bill, the net interest deduction is capped at 30% of Ebitda for four years, followed by an even tougher threshold going forward. Wulf sees this hampering growth for small businesses by making it more difficult to borrow money.
“You could grow your business on retained earnings,” he said. “But that’s no way to do it.”
This issue also ties back to the equipment conundrum outlined above. Without the ability to borrow as easily, small businesses will have a tougher time purchasing the machinery that could enhance labor productivity. In the end, this provision leaves companies more hamstrung financially and doesn’t help boost pay.
I thought that small business had dodged a bullet on deducting interest, but now the government is telling me how much leverage I can assume.
“I thought that small business had dodged a bullet on deducting interest, but now the government is telling me how much leverage I can assume,” Wulf said. “I would have slowed the growth of my restaurants when I was building them, as I know early on our interest exceeded 30% of Ebitda.”
3) Corporate tax cut
Simply put, so-called pass-through businesses like S-corporations and partnerships don’t look poised to realize as much of a benefit from tax reform as their C-corporation counterparts — though it’s tough to make a direct comparison between the two.
The new tax bill includes a 20% income deduction for pass-through entities, which on the surface seems like less than the 21% C-corp tax rate put forth in the plan. But when you combine that 20% deduction with the lower top tax rate on ordinary income, it actually comes out to a 29.6% top rate on that income, according to a Wall Street Journal analysis.
While Wulf realizes that there are many moving pieces when it comes to comparing the tax structures of C-corps and pass-throughs, he ultimately just wants small businesses to be on equal footing with large US corporations.
At the end of the day, a favorable and competitive tax rate provides more money to sink into capital expenditures. And that reinvestment then improves labor productivity, which then allows a business to rationalize paying higher wages.
It’s all connected, and all aimed toward the goal of expanding the economy — of which 70% is small businesses. In Wulf’s mind, the GOP bill doesn’t go nearly far enough toward realizing its professed objective of boosting US growth.
An eye on the future
It’s worth noting that Wulf’s outspoken advocacy for small businesses comes with little self-interest attached. He’s selling his Jimmy John’s stores, with an eye on retirement, and has just one store left to offload. In January, he’ll close on his final location, the 12th-best-performing Jimmy John’s in the US.
And his personal politics don’t play a role either. Wulf is a Republican, but he says he looks at political policies from a strictly economic viewpoint. That much can be seen through multiple pieces he’s written for various trade publications and local outlets in recent years.
At the end of the day, he wants to see small businesses thrive, and he doesn’t see the shiny new GOP tax bill allowing that. Which is ironic to him, considering their original stated objective.
“That’s the anchor here,” Wulf said. “There’s a problem with what they’re saying is going to happen and what the policy will actually create.”
Under this proposed tax cut, big small businesses benefit most … NPR 30 Nov 2017
The corporate tax rate is not the only important tax cut affecting businesses that’s being considered in the Republican tax bills. The pass-through tax rate affects millions of small businesses, and has been a point of debate and dealing. Hari Sreenivasan talks to Jim Tankersley of The New York Times about that and who really gets the biggest cuts.
Read the Full Transcript
Much has been made about how the corporate tax rate is getting cut under the Republican tax bills being considered in Congress. But there’s another important tax cut, one affecting small businesses, that’s also been the source of debate and dealing.
Hari Sreenivasan looks at what’s at stake in that battle.
We’re talking about what’s known as the pass-through tax rate. It sounds obscure, but it’s a rate affecting millions of businesses, ones that are not corporations, per se. And it’s called pass-through because the income of these businesses is passed through, so the owner pays the individual tax rate, typically higher than the corporate rate.
It affects the kind of classic small business you might think of, say, the corner dry cleaner, but it’s not just limited to just those. Hedge funds, partnerships, and law firms also can pay this rate. Some Republican senators held out to adjust that tax as part of the deal.
Jim Tankersley of The New York Times is here to help walk us through this.
Jim, I have had a couple of different examples here, but help me understand, who is the primary beneficiary of pass-through rates?
Sure. It’s a lot of people.
And it’s — just as you said, it starts with that small corner store, mom and pop store, and goes all the way up to lobby shops here in Washington and big law firms.
It’s really any corporation — well, sorry — any business that is not a corporation. And in particular, it’s a huge amount of economic activity right now in the United States. The majority of money earned in America comes through pass-throughs, not traditional corporations.
So why is this rate or the adjustment of this rate so important to the people who benefit from this?
Well, they want a level playing field with corporations, who are also getting a big tax cut in this bill.
And so they have asked for a lot of special treatment compared to just regular workers who pay through all sets of the individual income tax.
What are the rates as of now and how would they change? I know that’s still being negotiated to some level.
Well, that’s true. There’s still some moving pieces in the legislation. But, right now, if you’re a pass-through owner, you can pay up to 39.6 percent. That’s the top individual income tax rate.
The Senate bill would cut that rate to 38 percent for all individuals at the very top. And then, beyond that, for everybody, no matter what your rates are up and down the scale, they would give you a 20 percent deduction on the income you earn through your pass-through up to $500,000 for couples, $250,000 for individuals.
There’s also a big range of small businesses, so to speak, that aren’t corporations.
So, is there any idea of how many of these small mom and pop stores actually make enough money that they would benefit from not having to pay 39 percent, but maybe now down to 20 percent?
Well, the rate — it’s a deduction, so it actually helps up and down the income scale. So if you pay the 25 percent rate now, and you get a tax cut here, a rate cut, then you’re also going to get this deduction on top of that. That’s going to help you.
It’s going to help you if you pay the 12 percent rate. Now, interestingly, it is also going to also help, for example, the Trump Corporation, big companies that are again earning that top rate.
So, what you have here is a deduction, and what that deduction does is gives everybody up and down the scale some help.
So, there have to be some political considerations here of not wanting to look like you’re helping one constituency over another.
Is it the size, or, I guess, is it the peer group of the Trump corporations? Are they likely to benefit more just because they’re bigger?
Well, sure, yes. They make more money, so they’re going to get more a break.
And, like I said, this special benefit phases out a bit. You only get to take a half of it after $500,000. But that’s still a lot of money. It’s still a big deduction, and, again with the reduction in rates overall, the businesses that earn the most are going get the bulk of the benefits.
And we already know that 70 percent of the benefits for pass-throughs in America go to the top 1 percent of American income-earners. So, it is a cut for small businesses. It is also a cut that will predominantly help the rich.
One of the larger narratives here is the struggle to define who benefits the most. Is it the corporations? Is it the middle class?
What do we know about the overall distribution of how this tax plan is coming together?
Overall, in the bill, what we see is sort of a mixed bag for anybody at any income level, but predominantly a tax cut that predominantly helps the rich, but also — in pure dollar figures — but also has a lot in it for most middle-class families, but not all of them.
There are millions of middle-class families who would actually see a tax increase under the bill right away. And under the Senate bill, at the end of the decade, all American families would see a tax increase because they — the individual income tax cuts expire at the end of 2025.
While we are wonking out about tax rates and a specific clause, lots and lots of things are related to taxes. And as this bill points out, there are so many different kind of riders to secure votes here, from protections of the unborn, education, of course, health care.
Lots of things are affected by taxes.
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