Small businesses are important to our economy and to our economic recovery, so why should they be forgotten in tax reform plans? President Obama’s proposal on July 30 for a corporate tax cut completely ignores small businesses.
Many of them already pay higher taxes and faced a tax hike at the beginning of the year, yet the President’s flawed and incomplete plan only increases that inequity.
The fact is that comprehensive tax reform that includes reform of individual rates would benefit everyone. If a large corporation is better off with lower taxes, then it’s reasonable to suggest that a small firm is also better off with lower taxes.
If a lower rate for a big company is good for the economy and creates jobs, then likewise a lower rate for a small business is better for the economy and job creation. In this case, the fair thing to do is also the best thing to do for the economy.
It’s no challenge to convince most Americans that tax reform is a good idea. Most of us have heard comparisons of the cumbersome U.S. Tax Code, now at nearly four million words, which is about five times the word count in the Bible.
Since 2001, the code itself has been changed nearly 5,000 times, and the burden is on taxpayers to keep up with those changes. The National Taxpayer Advocate issued a clear warning in January that compliance is increasingly difficult for taxpayers.
This complexity hits small businesses hard. According to the 2013 Small Business Taxation Survey from the National Small Business Association, nearly 40 percent of owners report spending 80 hours or more per year on federal taxes — that’s two full work weeks spent just on federal taxes. Keeping up with requirements and changes takes time and expertise, all while running a business, often working long hours and worrying about budgets, payroll and inventories.
Small businesses face a compliance cost that is nearly three times that of big businesses. It’s no surprise then that 83 percent of small businesses favor comprehensive tax reform, according to the second quarter survey from the U.S. Chamber of Commerce.
Streamlining the tax code would also benefit the Internal Revenue Service (IRS). Right now, the agency is sending a letter to small businesses demanding more information to catch those who might have missed the mark in reporting their taxes. I have concerns about the IRS’s letter, but the broader point is that reducing the complexity in the tax code would go far in alleviating these collection concerns.
Tax reform is much more than just a tax cut. The code itself should be shortened and simplified, forms should be streamlined, many loopholes and disparities should be eliminated, and rates should be lowered. All Americans should benefit from the comprehensive process, and there should be plenty of room for bipartisan agreement on many of these principles.
The president’s narrow vision of tax reform does nothing for 75 percent of all U.S. businesses, which are organized as pass-through entities, such as LLCs and S corporations, and their owners pay taxes as individuals, not corporations.
Since cutting corporate rates would increase American competiveness in a global economy, then it stands to reason that small businesses — many of which are increasingly interested in the world marketplace — would be more competitive with equitable tax reform.
There are nearly 28 million small businesses in America, and they pack a big economic punch. Let’s look to their growth and jobs potential with optimism, and include them in sensible tax reform plans for the real recovery we need.
Unfortunately, the president’s approach once again picks a few winners and tacks more changes onto the massive tax code, under the label “reform.” That won’t do the job. This complicated tax code needs a thorough overhaul, and this time, small businesses shouldn’t be overlooked.
Rep. Sam Graves, R-Mo., is chairman of the House Committee on Small Business.