Congress has until Thanksgiving to come through with new legislation this year. Lawmakers should promptly agree on fixing the tax code and pass small business tax cuts. It’s the simplest achievement on the table that promises the most immediate positive impact.
The White House has led with a plan that would lower tax rates to 25 percent and simplify the grueling tax filing process. Current projections show the Republican tax blueprint would raise median household incomes by over $4,700, creating more than 50,000 full-time jobs.
As an economist and a Michiganian, I’ve seen firsthand how small businesses make America work. Our small firms employ half of all workers and provide 90 percent of exports. But because the federal government taxes many of them as so-called “pass-through” entities, they have to pay the highest individual tax rate — around 40 percent. Add in state and local levies, and the bite out of earnings can meet or exceed a 50 percent.
Almost all of America’s 29 million small businesses (95 percent) are taxed this way. Everyday Americans pay the price.
As if that burden weren’t unfair enough, small business face disproportionate pain just filing their excessive taxes. Across the country, Americans shell out almost $100 billion on filing individual returns, squandering over two and a half billion hours every year. With more than 2 out of every 3 small businesses obliged to pay for outside help, tax time costs millions of small businesses at least $10,000. One in 3 respondents told the National Small Business Administration they have to spend two full work weeks a year filing taxes.
The solution is clear: Cut the small business rate down from its current high to 15 percent, and simplify filing to save our job creators’ precious time. This is one of those special occasions when sound policy makes for sound politics too. Voters know small businesses help them thrive and that, under the current tax code, small businesses are hurting. More than 70 percent agree individual rates are unfair, according to a recent Morning Consult/POLITICO poll. Majorities say that small businesses pay too much — and that the White House’s plan to help them is the right approach.
That’s because they know small businesses put their money right back to work for families and local neighborhoods. Most small businesses would use the money saved by cuts to beef up their productivity, hire more employees, or increase wages, polling from the Job Creators Network has found.
Those are just the kinds of growth-oriented results that Americans want out of tax relief. If you’re a lawmaker looking for a clean win late in the legislative game, look no further than tax cuts.
Voters know Congress has one final chance this year to do the right thing. There’s no shortage of national challenges to tackle, but with time at a premium, it’s essential to prioritize simple, straightforward changes to the status quo.
Small business owners — and the millions of Americans who depend on them — have their fingers crossed for tax relief. It’s time to put an end to America’s tax insanity once and for all.
Michael Clark is the Reemelin Chair in Free Market Economics at Hillsdale College.