The most powerful and uber sophisticated of these groups is the anti-small business Democrats opposing Trump tax reform plans in Congress.
These people are smart enough to know their agenda is anti-business, but also smooth enough to not sound like it.
And powerful enough to convince other Democrats to go along with their agenda...
This is odd behavior given the vast size of the small business sector in the United States. According to the US Census Bureau, small businesses with less than 20 workers account for 89.6% of all businesses. And 50% of non-governmental American workers are employed by small businesses.
These numbers are not lost on Republican politicians. Tax cuts for small businesses have been part of every Republican Presidential campaign platform since Ronald Reagan.
Campaign Promises to Cut Small Business Taxes
With his latest tax reform proposal, President Trump aims to make good on his campaign promises to cut small business taxes.
How good? Well, first allow me to give a brief, over-simplified and hopefully non-boring lesson in business taxation.
Currently, in the United States, the highest Federal individual income tax rate is 39.6%.
The corporate tax rate is 35%.
Most American businesses establish themselves as ‘pass-through entities.' The government permits small businesses such as S-Corps, partnerships and LLC’s (limited liability corporations) to pass-through income the business earns straight to tax returns of the owners.
Why would a small business owner do this? Because of a concept known as ‘double taxation.' Profits of regular C-Corporations are taxed at the 35% corporate tax rate. When the owner of that company pays themselves, assuming they are in the top tax bracket, they get whacked again at 39.6%.
By the time they get their paycheck, their money has been taxed 75.6% just at the Federal level. This doesn’t even include State, local and other taxes.
Nobody in their right mind would do this, but business owners also needed the liability protection offered by corporations.
To fix this problem, back in 1986 Congress passed tax reform which created the ability for business owners to establish pass-through entities so they could avoid the double taxation issue.
As you would expect, the overwhelming majority of American small businesses today are these pass-through entities.
This is precisely why small business owners could care less when Congress talks about corporate tax rate cuts. Regardless of how they frame the soundbites, those talks are all about big corporations saving money, not small business owners.
Remember what we just learned? Small business owners are already paying the maximum individual tax rate of 39.6%, not the 35% corporate tax rate.
Trump Tax Reform Plans
So how do Trump tax reform plans help small business owners? By introducing three main changes to how small business income is taxed:
- Corporate tax rates would be reduced to 15%. No, that doesn’t matter to small business owners, but the next part does;
- Pass-through business income would all be taxed at corporate tax rates of 15%; and
- Sole proprietor and freelancer income would also be included in the 15% corporate tax rate level.
Is it any wonder why Trump tax reform plans are popular with small business owners? It would allow them to reinvest more earnings back into their businesses. Ultimately giving them more resources to expand their businesses, hire more employees and improving the economy.
Freelancers and sole proprietors would benefit from taking home more of their income. This is life-changing for an estimated 20% of the 55 million freelancers that are unable to afford health insurance under Obamacare. It would also increase their ability to save for retirement.
Anti-Small Business Democrats Opposing Trump Tax Reform
The groups opposing Trump tax reform plans argue that these proposals will simply allow small business owners to game the tax code by changing how they take money out of their business.
How so? By using made-up examples to fit their anti-small business agenda. Like showing a ‘rich’ business owner currently paying the 39.6% individual tax rate will opt instead to take most of their income as business profits at the lower 15% rate.
Anti-small business Democrats have forgotten whose money it is that they are taxing.
The fundamental flaw in this argument is that they neglect to include the massive amount of additional costs that small business owners pay before ever realizing a profit.
This is common sense to anybody actually in business. Unfortunately, Democrats opposing Trump tax reform plans have never run a business. So the hard work that goes into creating profits tends to be a difficult concept for them to comprehend.
Explaining Taxes to a Teenager
It’s similar to explaining taxes to a teenager.
It doesn’t mean anything to them until they get their first paycheck and experience firsthand how much of their money goes to the government. Lower taxes suddenly make more sense.
The ‘not paying their fair share’ narrative has been the problem with anti-small business Democrats during every election cycle.
They will point to a successful local business that fits their agenda such as a doctor, lawyer or dentist. Then they highlight the fact that the business is an LLC earning a million dollars a year, but the owner only shows $80,000 in personal income. Implying, of course, that the small business owner is hiding money to avoid paying taxes.
Do they include the expenses that come out of that million dollars such as payroll, rent, equipment, utilities, insurance and the multitude of other business costs? No, not at all. That does not fit their agenda.
As small business owners, we understand how this works.
Unfortunately, we aren’t as skilled at creating effective soundbites as the anti-small business Democrats.