Tax simplification is sorely needed, as anyone who just filed a return with the IRS knows too well. And the Small Business Tax Cut Act now before Congress certainly is an uncomplicated piece of legislation.
Unfortunately, it’s also simply a bad idea.
Proposed in the House of Representatives by Majority Leader Eric Cantor, the measure would allow small firms to deduct up to 20 percent of their income in 2012. It defines a small business as any firm with fewer than 500 employees.
By that definition, the bill would apply to nearly all U.S. businesses (99.6 percent), from mom-and-pop shops to the New York Giants and Oprah Winfrey’s production company, as Roll Call has noted. And at a time of record U.S. debt and deficits, it would reduce federal tax revenue by nearly $46 billion.
Worse still, most U.S. small businesses would not actually reap the benefit of this tax break. Startups or struggling firms operating in the red would not get a penny. But even among profitable businesses with fewer than 500 employees, the distribution of tax savings would be highly skewed.
A Tax Policy Center analysis shows that only 5.6 percent of the total tax savings would go to small-business filers with income of $100,000 or less. By contrast, 49 percent would go to those with earnings topping $1 million—a group comprising 0.3 percent of all individual and corporate taxpayers.
Unlike other proposed federal legislation, this bill would not require tax-break recipients to hire even a single additional worker; in fact, a small business could lay off half of its staff and still be eligible to receive the break. Which makes this measure a sweet deal for the Super Bowl champs, hedge fund and private-equity fund managers, lawyers, lobbyists and others—but a lot of nothing for the overall economy.
And did we mention the additional paperwork requirements it would entail? The Ways and Means report on the bill states that it “likely will increase the tax preparation costs for most affected small businesses. (They) will have to perform additional analysis concerning whether the small business had no more than 500 employees and which income qualifies for the deduction.”
If it truly wanted to help, Congress could do many things to boost ordinary small businesses. This isn’t one of them.
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