Tax reform is on the minds of elected officials in Washington and in many state capitals. If and when reform is passed, the likelihood that big business will benefit is high. Unfortunately, although small business represents 99.7 percent of all American firms, as defined by the U.S. Small Business Administration (SBA), it’s unlikely they will benefit at all.

According to the SBA, small business has created 64 percent of net new jobs, 46 percent of gross domestic product, 50 percent of private sector employment, and 33 percent of U.S. exporting value. Not a bad effort for average Americans who follow their dreams and take responsibility for their lives.

Small business owners, who typically are under capitalized and overworked, support American community life and don’t move their businesses out of the country. Consequently, one would expect our elected officials to vigorously support legislation that both encourages and reinforces the development of small business. Unfortunately, this it not the case.

The most basic tax small business incurs is property tax, an important revenue source for any U.S. community. Principally, property taxes pay for schools, waste management, roads and public safety — services important for any small enterprise. On the other hand, big businesses often work hard to avoid property taxes by receiving preferential arrangements like Tax Increment Financing (TIFs).

TIFs are tax avoidance plots that could relieve big firms of as much as 80 percent of local property taxes for up to 30 years. This tax loss is transferred to all other taxpayers, including small business owners.

An important first reform to benefit small business and local communities is the repeal of property tax avoidance schemes. In turn, big business would begin to pay its fair share of local services and thereby reduce the burden currently placed on small business owners and other taxpayers.

Small business owners generally do not have the tax avoidance resources that big business enjoys.

A second recommended tax reform is the elimination of long-term capital gains on small business gains less than $5 million. In addition to being sound economic policy, this would particularly help the larger-scale small businesses.

Surprising to many, 52 percent of small business is home-based. The most important long-term capital gain for many home-based business owners is the gain in value of their house — and it is likely already exempt from long-term capital gains taxes. The largest firms in the small business category are making other types of capital investments. These companies invest in capital assets that increase revenues, productivity and shareholder value. Free of long-term capital gains taxes, small business owners would stay focused on growing the value of their businesses and delivering the subsequent benefits to their investors, employees and communities. Unlike Fortune 500 companies, they are not living under the ill-considered demands of presenting what are unrealistic profits for the next quarterly report.

The final suggested tax reform involves corporate tax rates for big businesses that are effectively stuck at an average rate of 13 percent. The effective corporate rate for bigger firms should be approximately 20 percent. A strategy to achieve this would involve repealing the most egregious loopholes designed for those with legislative influence.

The average s-corporation, which typically is a small business, currently pays a corporate tax rate of 26.9 percent — twice as high as big business. Why? The small business s-corporation owners generally do not have the tax avoidance resources that big business enjoys.

To remedy this inequity, a strategy could involve taking a portion of the increased revenue from an effective rate of 20 percent and provide a tax credit against the income taxes for small business owners who create jobs, particularly in the export sector. This not only would reduce the effective tax rate of small business owners, but also help lower the trade deficit.

Another more daring idea might be to eliminate the corporate income tax entirely, loopholes and all, and enact a consumption tax (including services) with a rule similar to the earned income tax credit for the lower income businesses, limited liability companies, sub-chapter s corporations. and sole-proprietorships.

These reforms, if enacted, could spur greater economic growth and job creation. And entrepreneurship and small businesses, a real strength behind America, would be leading the way. However, to achieve these goals, small business must be on a level playing field with America’s business giants. Tax reform for small business is a good place to start.


James Wilfong
About The Author James Wilfong
James Wilfong is Chairman of Innovative Applied Science. He also is an international business practitioner, educator, Veterans business advocate, public servant, and a member of VET-Force and the President’s Task-force on Veteran’s Business Development.

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