(This article originally appeared in The Washington Times)
Chip, chip, chip.
Back in April, the Biden administration proposed, as part of its stimulus and infrastructure plans, to increase personal tax rates on the “wealthy” (those earning more than $400,000 per year) to 39.6%. Small business owners – my clients – who are pulling down these enormous salaries would see more of their earnings go to the government.
Then in May, the administration floated another plan to increase capital gains rates on those same people – you know, the wealthy – to what could be as much as 43.4%. My same clients who make investments would also have to fork over more to Uncle Sam.
Chip, chip, chip.
But enough beating around the bush. How about just going after small business owners directly? That’s exactly what’s happening, thanks to a new proposal to phase out the popular “small business tax deduction,” otherwise known (at least to accountants like me) as the Qualified Business Income Deduction (or the Section 199A deduction if you really want to get technical).
Most small business owners are familiar with this deduction because…it’s significant. For those of us filing “pass-through” tax returns (S-Corporations, partnerships, etc.), thanks to the 2017 Tax Cuts and Jobs Act, we’re allowed to lop off 20 percent of our business income before it “passes through” to our personal returns. So a business owner making $100,000 in profits would only be taxed on $80,000.
Unfortunately, and because of the dogged pursuit to fund the Democrats’ stimulus and other programs, this tax deduction is now under scrutiny. Ron Wyden, a Democratic Senator and head of the Senate Finance Committee, is considering phasing out the deduction for “high earners” making more than $400,000 and eliminating it for those small businesses making more than $500,000.
Chip, chip, chip.
“I’m looking at ways to revamp the deduction to ensure it’s not just a giveaway to the top,” Sen. Wyden told Bloomberg Law. “For example, phasing out the deduction at high-income thresholds would allow us to fix the problems with the deduction for middle-class small business owners, including making more of them eligible by ending industry carve-outs.” Sen. Wyden’s proposal would reduce some of the complexity surrounding the deduction’s calculation.
But, according to the same report, he will certainly face challenges. “Clearly, Senate Republicans are not interested in revisiting the 2017 tax bill,” Senate Minority Leader Mitch McConnell (R-Ky.). “I think the president and vice president understand that.”
Chip, chip, chip.
The loss of this deduction – coupled with previously proposed higher personal and capital gains rates – would take away even more money that would be otherwise spent or invested on people, products, property and equipment and instead give it to the government to spend. How much money? In the case of the small business tax deduction, let’s do the math.
Say a “wealthy” business owner makes $500,000 per year. Under Sen. Wyden’s proposal, business owners may have to pay taxes on that $500,000 instead of $400,000 after the 20 percent deduction, so – assuming a 25 percent tax rate, the business owner would pay an additional $25,000 in taxes. If the business owner makes $600,000 because of the loss of the deduction, she would pay an additional $30,000 and so on.
You may say that $400,000, $500,000, or even $600,000 is a lot of money to make. But few are actually “making” that money. The “wealthy” business owners running companies don’t pocket that amount. Whatever money is earned is already tied up in working capital. It’s being invested in their businesses and their people. It’s already spent on inventory, research, marketing, and capital equipment. Taking funds away from them by raising tax rates on income and investments won’t kill small businesses. We’re more resilient than that. But it will certainly curtail our ability – and our desire – to make these investments, hire people and grow our businesses.
These proposed tax increases are quietly chipping away at the livelihoods of the very people who employ more than half the workers in this country and contribute more than half our nation’s GDP. What’s worse, they’re being targeted under the guise of taxing the “wealthy.”
Making $500,000 a year is not wealthy. Making $73,000,000 in annual compensation, like Larry Kulp, the CEO of General Electric, did is wealthy. So is making $54,000,000 annually or $44,000,000. That’s what the CEOs of Nike and Microsoft made last year. And that’s just the CEOs. There are hundreds and hundreds of executives that report to the top-earning CEOs who also make millions. These are the people making lots of money with little risk.
The business owners targeted by all of these tax increases make much less money – while risking much, much more. Unfortunately, now the money they’re making is being chipped away. How many more chips are left to come?
