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Leveling The Playing Field

- September 14, 2017

Tax Reform Would Ensure That No Corporation Or Individual, No Matter How Wealthy, Is Given An Unfair Advantage In U.S. Tax Law

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TOP TAKEAWAYS

  • High taxes are the number one concern of small business owners today--cutting these taxes creates a business friendly climate that allows them to create jobs and invest in the future.
  • Most small business owners feel complying with the U.S. tax code is a larger burden than the actual cost of taxes; by eliminating complicated, costly loopholes, and simplifying the tax code President Trump's tax reform goals will alleviate this burden.
  • Republicans have proposed cutting tax rates for "pass-through" entities, often small businesses, so that they enjoy the same opportunities for growth as do large corporations.
  • Goals for tax reform include eliminating the carried interest loophole that allows wealthy, Wall Street money managers to pay taxes at a rate far below what the average American would pay at the same income level.

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PRESIDENT TRUMP WANTS TO LEVEL THE PLAYING FIELD FOR SMALL BUSINESSES

Small Businesses Are Among America's Most Important Job Creators

Small Businesses Created 61.8 Percent Of New Jobs In The United States From 1993 To 2016. "Small businesses accounted for 61.8% of net new jobs from the first quarter of 1993 until the third quarter of 2016. Figure 2 shows details from 1993 to 2016." ("Frequently Asked Questions," Small Business Administration , Accessed 9/13/17)

99.9% Of All Firms, And 99.7% Of Firms With Paid Employees Are Classified As Small Businesses. "Small businesses comprise: 99.9% of all firms, 99.7% of firms with paid employees." ("Frequently Asked Questions," Small Business Administration , Accessed 9/13/17)

Small Businesses Have A Strong Preference For Hiring Locally, As Opposed To Large Corporations Who May Already Have A Team In Place When Moving To A New Location, This Generates Job Growth And Opportunity For Individuals In The Surrounding Areas. "Small businesses also operate locally, which gives them a strong preference for hiring local people. Big corporations often move into new territory with a team already in place, which can improve a city's population, but nothing drives new job growth in a region like more powerful small businesses." (Jose Vasquez, "Why Are Small Businesses So Important For The Economy?," The Huffington Post , 4/18/17)

President Trump's Goals For Tax Reform Would Lower The Tax Rate For Small Businesses

Both The Trump Administration And House Republicans Have Proposed Dramatic Tax Reductions On Income Earned From Pass-Through Businesses. "Both the Trump administration and the 2016 House Republican tax reform plan propose large reductions in taxes paid on business income, including taxes paid by owners of pass-through businesses. For instance, the Trump tax plan proposes reducing the corporate tax rate from 35 percent to 15 percent and the top tax rate on income earned from pass-through business from 39.6 percent to 15 percent." (Aaron Krupkin and Adam Looney, "9 Facts About Pass-Through Businesses," Brookings , 5/15/17)

95 Percent Of Businesses Are Counted As "Pass-Through" Businesses Rather Than Corporations, They Are Not Subject To The Corporate Tax Rate, Their Income Passes Through To The Owners And Is Taxed At Their Individual Income Tax Rate. The overwhelming majority of businesses in the U.S. are not C-corporations subject to the corporate tax. Rather, most businesses-about 95 percent-are "pass-throughs," which have their income 'pass through' to their owners to be taxed under the individual income tax. (Aaron Krupkin and Adam Looney, "9 Facts About Pass-Through Businesses," Brookings , 5/15/17)

  • The Most Common Pass-Through Businesses Are Sole Proprietors, And These Businesses, Owned By A Single Taxpayer, Are Often Small Businesses. "Sole proprietorships are the most common type of pass-through business and represented 43 percent of pass-throughs and 41 percent of all businesses. These companies are operated by a single taxpayer in a wide range of businesses, ranging from babysitters and housekeepers, ride-sharing drivers, construction or handyman services, and even some doctors and lawyers. Because sole proprietorships enjoy fewer legal protections than incorporated businesses and are owned by a single taxpayer, they tend to be relatively small." (Aaron Krupkin and Adam Looney, "9 Facts About Pass-Through Businesses," Brookings , 5/15/17)
  • 43 Percent Of Pass-Through Businesses And 41 Percent Of All Businesses Are Sole Proprietors. "Sole proprietorships are the most common type of pass-through business and represented 43 percent of pass-throughs and 41 percent of all businesses." (Aaron Krupkin and Adam Looney, "9 Facts About Pass-Through Businesses," Brookings , 5/15/17)

Small Business Owner Rob Berger Said, A "Significant" Part Of Trump's Tax Proposal Is Cutting The Corporate Tax Rate For Pass Through Entities, "These Are The 'Mom And Pop' Businesses That Power Much Of The Employment In Our Country." "Trump has proposed cutting the corporate tax rate from 35% to 15%. Significantly, this proposal would apply not only to large corporations. It would also apply to small pass-through entities like limited liability companies and subchapter S corporations. These are the 'mom and pop' businesses that power much of the employment in our country." (Rob Berger, Op-Ed, "A Small Business Owner's Take On The Trump Tax Plan," Forbes , 4/28/17)

Cutting Taxes Is Crucial To Helping Small Businesses Thrive

The Number One Concern Of Small Business Owners In America Is Taxes. "Taxes are the No. 1 concern of small-business owners, according to the first CNBC/SurveyMonkey Small Business Survey, released on Friday. A quarter of small-business owners said that taxes are the most critical issue currently facing their businesses." (Elaine Pofeldt, "Most Entrepreneurs Are Optimistic Trump Will Rewrite Tax Code That 'Strangles Them,'" CNBC , 9/9/17)

President Trump's Plan To Slash Corporate And Individual Tax Rates Has "Won Many Fans Among Small Business Owners." "It's no surprise that President Donald Trump's proposal to cut individual and corporate taxes won many fans among small-business owners. 'Taxes obviously are a big issue for small businesses in terms of the bottom line, profitability and having resources to invest and grow,' says Raymond Keating, chief economist for the Small Business & Entrepreneurship Council, a national nonpartisan, nonprofit small-business advocacy group." (Elaine Pofeldt, "6 Ways States Are Creating Small Business Hot Spots - And Jobs," CNBC , 7/11/17)

Small Business Owner Rob Berger Said President Trump's Tax Proposal "Would Encourage Small Business Owners To Hire More Employees And Contractors." "In addition, the tax proposal would encourage small business owners to hire more employees and contractors. The reason is twofold. First, by freeing up capital that now gets shipped off to Washington, small businesses would have the resources to invest back into their companies. Second, business owners would have an incentive to shift work they are now performing to others. This, in turn, would justify lowering the owner's salary (they are doing less work) taxed at higher rates, and shifting it to profits taxed at lower rates." (Rob Berger, Op-Ed, "A Small Business Owner's Take On The Trump Tax Plan," Forbes , 4/28/17)

Small Business Owners Love Doing Business In States Like Texas Where Lower Tax Rates Have Created A "Business Friendly Climate." "It's no accident that Albertson and many other small-business owners love doing business in Texas - which finished No. 4 in CNBC's 2017 Top States for Business rankings. Texas officials work hard to keep it that way, offering many programs to support entrepreneurs, such as one that provides grants to communities for educational programs targeting small-business owners. 'Texas really focuses on having a business-friendly climate. A reasonable regulatory climate and a low tax burden make it attractive for entrepreneurs and small-business formation,' says Adriana Cruz, president of the Greater San Marcos Partnership." (Elaine Pofeldt, "6 Ways States Are Creating Small Business Hot Spots - And Jobs," CNBC , 7/11/17)

  • Julie Albertson, Who Owns A Small Business That Employs 18 People, Says That This "Business Friendly Climate" Has Helped Grow Her Business. "Albertson, a former banker, says the environment in Texas has buoyed the growth of her business, which has 18 employees. 'We've seen a rise of tourism and people moving to the state and the Central Texas region," says Albertson. "People from all over the world are moving here.' Many tell her they are drawn by the promise of good jobs in the state, as well as reasonable housing costs." (Elaine Pofeldt, "6 Ways States Are Creating Small Business Hot Spots - And Jobs," CNBC , 7/11/17)

SIMPLIFYING THE TAX CODE ELIMINATES THE ADVANTAGE ENJOYED BY LARGE CORPORATIONS WHO CAN AFFORD TEAMS OF TAX PROFESSIONALS

The Complex Tax Code Is Costly For Small Businesses Who Can't Afford To Hire Dedicated Tax Professionals

The Cost Of Tax Compliance Per Employee Is Three Times Greater For Firms With Less Than 20 Employees Than It Is For Firms With More Than 500 Employees. (Nicole V. Crain and W. Mark Crain, "The Impact of Regulatory Costs On Small Firms," Small Business Administration , 9/10)

One Third Of Small Businesses Spend More Than Two Full Work Weeks Each Year On Federal Taxes Alone. "The federal tax burden is consistently ranked among the top issues facing small business, and one-in-three small businesses report spending more than 80 hours-two full work weeks-each year on federal taxes." ("NSBA 2017 Small Business Taxation Survey," Small Business Administration , Accessed 9/12/17)

67 Percent Of Small Businesses Spend More Than $1,000 Each Year On Administering Federal Taxes. "The majority of small businesses-67 percent-are spending more than $1,000 each year on the administration alone of federal taxes." ("NSBA 2017 Small Business Taxation Survey," Small Business Administration , Accessed 9/12/17)

For Small Businesses, The Cost Of Actually Paying Taxes Is A Larger Burden Than The Cost Of The Taxes Themselves. "Administrative burden (58 percent) continues to pose a much bigger burden than the actual financial cost of federal taxes (38 percent) for small business." ("NSBA 2017 Small Business Taxation Survey," Small Business Administration , Accessed 9/12/17)

Eliminating Deductions That Benefit Large Corporations Tax Reform Will Make Small Businesses More Competitive

One Of President Trump's Chief Economic Advisors, Gary Cohn, Said "Deductions Actually Affect The High-Bracket Payers, So When You Actually Simplify That Tax Returns You're Actually Affecting The High Taxpayers The Most." "'Simplification does not mean tax cuts for the higher end of the bracket. We can simplify and we can get rid of a lot of the deductions,' he said in a live interview Friday morning on 'Squawk on the Street.' 'Those deductions actually affect the high-bracket payers, so when you actually simplify that tax returns you're actually affecting the high taxpayers the most.'" (Jeff Cox, "Trump Advisor Cohn: Simplifying The Tax Code Will Tax The Wealthy At A Higher Rate," CNBC , 9/1/17)

90 Percent Of Small Business Employers Agree That Large Corporations Use Loopholes To Avoid Taxes, And Three Quarters Agree This Harms Small Business. "Small Business Majority's scientific opinion polling found 90 percent of small employers say big corporations use loopholes to avoid taxes that small businesses have to pay, and 92 percent say it is a problem when big corporations use such loopholes. What's more, three-quarters of owners say their small business is harmed when loopholes allow big corporations to avoid taxes." (John Arensmeyer, Op-Ed, "Small Businesses Like Corporate Tax Cut Only If Loopholes Closed," The Hill , 3/8/17)

CLOSING THE CARRIED INTEREST LOOPHOLE WILL CREATE FAIRNESS IN THE TAX CODE

The "Carried Interest" Loophole Currently Enables The Average Hedge Fund Executive To Pay A Tax Rate Significantly Lower Than Any Other Individual Would On The Same Income

Carried Interest Is The Profit Paid To Venture Capitalists, Hedge Fund Managers, And Real Estate Investors And Is Taxed At A Lower Rate As Capital Gains. Carried interest is the portion of a fund's profit -- usually a 20 percent share -- that's paid to private-equity managers, venture capitalists, hedge fund managers and certain real estate investors. Currently, tax authorities treat that income as capital gains, making it eligible for the lower rate. (Sahil Kapur, "Mnuchin Hints At Keeping Carried Interest Tax Break For Some," Bloomberg , 8/21/17)

  • The Median Pay For Hedge Fund Executives In 2016 Was $400,000 Dollars. "The median pay for hedge fund executives, including bonuses, was $400,000." (Frank Chaparro, "Here's How Much People Make Working For A Hedge Fund," Business Insider , 1/25/17)
  • A Hedge Fund Manager Earning $400,000 A Year Is Subject To A 33% Tax Rate When Filing As An Individual Or Filing Jointly. ("IRS Tax Rate Schedules," Internal Revenue Service , Accessed 9/12/17)

The Carried Interest Loophole Allows Investment-Fund Managers To Pay Roughly Half The Top Rate For Ordinary Income. "The so-called carried interest loophole enables investment-fund managers to pay a tax rate as low as 20 percent -- roughly half the top rate for ordinary income -- on much of their income." (Sahil Kapur, "Mnuchin Hints At Keeping Carried Interest Tax Break For Some," Bloomberg , 8/21/17)

President Trump Campaigned Against The Carried Interest Tax Loophole Saying Hedge Fund Managers Who Use It Are "Getting Away With Murder." "Trump highlighted the carried-interest tax break during his populist presidential campaign, labeling some hedge fund managers as 'paper pushers' who are 'getting away with murder.'" (Sahil Kapur, "Mnuchin Hints At Keeping Carried Interest Tax Break For Some," Bloomberg , 8/21/17)

Treasury Secretary Steve Mnuchin Said, "We Will Close The Loophole For Hedge Funds In Carried Interest." "'We will close the loophole for hedge funds in carried interest,' Mnuchin said at an event in Louisville, Kentucky, where he appeared alongside Senate Majority Leader Mitch McConnell." (Sahil Kapur, "Mnuchin Hints At Keeping Carried Interest Tax Break For Some," Bloomberg , 8/21/17)


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