It's Never Smart To Raise Taxes On Small Businesses

Jim Blasingame

During the 2020 presidential campaign, Joe Biden regularly promised to raise taxes. Here are quotes candidate Biden made between his convention acceptance speech and election day on how and why he would raise taxes if he became president. 

“I will raise taxes for anybody making over $400,000,” Biden said. “It’s about time the very wealthy should pay a fair share … corporations should pay a fair share.”

He continued, “It’s smart to tax businesses … making excessive amounts of money … and paying no taxes.”

And when asked about taxing small businesses and individuals, without any sense of shame for being so obtuse about the sector representing half of the U.S. economy and signing the front of 100 million paychecks, Biden said: “No one would have a tax increase who earns less than $400,000 annually.”

When Joe Biden made those promises last year, small business owners believed him. Three days before the election, our November 3, 2020 survey of Main Street operators revealed more than three-fourths of our respondents were not going to vote for Biden. And now, barely two months into his first term, the new president is making plans to make good on his “tax the rich” promise. 

But there’s a giant defect in Biden’s plan: His metric for where to start taxing the very wealthy and corporations lands hard on small business families.

Let me hasten to remind you that when it comes to anyone or anything being unfair or harmful to small businesses, my finger is indiscriminate and bipartisan regarding whose policy it pokes. In three 2017 articles – and numerous times on my radio program – I scorched Republicans about their plans and eventual passage of the Tax Cut and Jobs Act, which did not treat small business the same as big business. 

So, now, it’s the other side’s turn to feel my Main Street indignation as it becomes clear that small businesses may once again be disproportionately harmed by tax changes. And we’ll use Mr. Biden’s own words to make the rebuttal. 

Pay a fair share: Some beneficiaries of our economic system do take advantage of the tax system – so make the “carried interest” crowd pay more. But rest assured, any small business family with a taxable income of $400,000 or more: a) earned every penny at great personal financial risk (no hedging here), and b) is already the personification of “pay a fair share.”

Very wealthy: This is code for “punish success.” For any living American, wealth is not a tax code factor. And crossing the $400k taxable income threshold doesn’t make you wealthy, let alone very. Yes, many small business owners have become financially independent through hard work and risk-taking, but you’ll be hard-pressed to find anyone currently operating a small business who is “very wealthy.” 

Corporations should pay more: It seems that Biden’s tax increase net would catch the owners of pass-through entities that pay no tax, like Limited Liability Companies (LLC), partnerships, and the largest group, Sub S Corps. Profit generated by these entities becomes taxable income distributed to the shareholders – small business owners. 

Small business growth gets funded organically from profits left in the business to capitalize expenses risked in the hope of future growth revenue. Making a small business “pay more” taxes reduces that source of growth capital and therefore hinders national economic growth and job creation. I’ve asked small business owners all over the world this question: If you got a tax cut, what would you do with it. One hundred percent said, “I’d put it back in my business.” Any questions?

It’s smart to tax businesses: Has anyone else ever referred to tax increases as “smart”? It’s necessary to tax businesses, maybe even righteous. But what’s smart about raising the taxes of job-creating, product/service delivering, profit-investing small businesses just because they’re successful?

In our global marketplace, smart would be not hindering the competitiveness of any American business. Currently, the U.S. corporate tax rate puts our globally-competing companies just below the average for developed countries, which lately has resulted in more onshoring and less offshoring. Smart.

Furthermore, large American corporations are essentially just domiciled here, often with most of their revenue and profit generated outside the U.S., so they can easily move financial interests around to minimize unsmart taxes. Small businesses, on the other hand, are planted in the ground with very limited options for avoiding stupid taxes. 

It’s never “smart” to raise taxes on small corporations. Any questions?

Only $400,000 or more will be taxed: Currently, the Biden position on who is subject to that number is “a taxpayer,” which includes a couple filing jointly. And if they report over $400k in taxable income, President Biden would tax them like an individual reporting the same amount. Unfair is never smart.

Let’s breakdown a likely and common taxable income scenario of a small business couple filing jointly. The spouse contributes $75,000 from an unrelated job, while the owner’s taxable income is $150,000 made up of earned income from the company and some rental income. Like most, the business legal entity is a Sub-S Corp, so its $175,000 profit becomes taxable income on the couple’s joint return. Consequently, they would qualify to pay more on President Biden’s tax-the-wealthy agenda.

Does this hard-working, successful small business family sound wealthy? This couple likely practiced deferred gratification for years in order to build that business. And not only did they risk everything they owned, including their home, but it’s likely that there is business debt involved to fund some of the growth creating that pass-through profit. That means the owner (and possibly the spouse) is an individual guarantor of the bank loan. Wealthy people don’t have to hock their houses to get wealthier.

Perhaps now you can see why I see red when a politician says it’s smart to tax the wealthy and corporations while using a baseline that would hurt the very non-wealthy, middle class, job-creating, risk-taking, Little League coaching, backbone of the U.S. economy, and America itself. 

This week, when we asked small business owners what they thought of Biden’s current plan to raise taxes on those earning over $400,000, 88% said it was either wrong, stupid, or would hurt small businesses disproportionately. Any questions?

Write this on a rock ... President Biden, it’s neither smart nor righteous to raise taxes on small businesses.


Jim Blasingame is the author of The 3rd Ingredient, the Journey of Analog Ethics into the World of Digital Fear and Greed.

 

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