As Congress undertakes what promises to be an exciting and, perhaps at times, unnerving debate over tax reform, I fear we may not be asking one important question:
How will this overhaul of the code help — or hinder — entrepreneurs, who are essential to American competitiveness? The underlying argument for tax reform is that by simplifying the tax code through deduction elimination and rate reductions, we will promote economic growth. Make no mistake: how specific tax reform decisions impact entrepreneurs will have a direct effect on our economic vitality and the innovation-driven renewal that is essential for long-term American competitiveness.
This is a real issue. After remaining remarkably consistent for decades, the number of new businesses launched in the United States peaked in 2006 and then declined dramatically. Data released by the Census Bureau in September shows that new business formation continues to languish near a record low. From 2000 to 2006, the economy produced an average of 511,000 new businesses each year. Since 2009, however, the number of new companies launched annually has dropped to about 400,000.
Here are some tax code changes we could make to help entrepreneurs, and thereby catalyze the US economy.
Cut the corporate rate. It’s great that Congress is likely to cut the corporate tax rate, which now stands at 35%, making it among the highest in the world. That high rate is a real disincentive to form businesses in the US and an incentive to keep profits overseas.
Today, business is mobile and there’s nothing to stop an entrepreneur from incorporating his or her company in Ireland or India instead of the US.
Cut the pass-through rates. The administration and legislators are also talking about lowering the tax rate for pass-through entities, such as an S-corporation, a partnership, a limited liability corporation (LLC) or a sole proprietor. They’re called pass-through businesses because the profits pass through the entity itself, As such they are taxed on the owner’s individual tax return where the rate can be as high as 43.4%, which includes the top individual rate of 39.6%, plus the net investment tax of 3.8%. Taxing pass-through businesses at a lower rate makes sense. Congress should increase limits for deducting start-up and organizational expenses from the current $50,000 levels to $100,000 each.
Make the fixes permanent. Congress should also make any changes permanent. Business leaders don’t need the confusion of provisions that expire after 5 or 10 years.
And Congress should do everything it can to simplify the code. Tending to taxes is complex and costly for most entrepreneurs whose limited funding is better spent engineering the next advance in cybersecurity or developing a cure for cancer.
Rep. Pat Tiberi, a Pennsylvania Republican and the outgoing chairman of the Congress’s Joint Economic Committee, and Sen. Martin Heinrich, a New Mexico Democrat, took a positive step in October by holding a hearing on how tax reform could ignite entrepreneurship. With our entrepreneurs very much in mind, it would be terrific if all of Congress would heed TIberi’s comments at the outset of the session:
“Entrepreneurship matters. It matters because start-up businesses drive the innovation that fuels economic growth and opportunity. Very importantly, entrepreneurs matter because nearly all the gains in job creation come from businesses less than a year old — true start-ups … Tax reform is a key tool in our policy arsenal that could remove artificial barriers to starting a business and foster an environment where entrepreneurship can thrive.”
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