Main Street policy experts worry that by raising corporate taxes to 28% small businesses still recovering from the Covid-19 shutdowns will be hit as hard as Apple and Amazon.
President Joe Biden has made reining in the wealth and power of America’s biggest companies one of his policy priorities. But as the debate moves to Capitol Hill and the president’s spending ambitions have surprised many, small business policy experts have a growing sense that Main Street could become a financial casualty of the plan at a time when many operations are just getting back on their feet after the pandemic.
The highest-profile proposals President Biden has made include a corporate tax hike to 28% at a time when companies like Amazon have in recent years paid an effective tax rate of zero. Many independent contractors are also concerned about the labor protections in the PRO Act, which could require gig economy players like Uber and DoorDash to treat independent contractors as employees.
These policy proposals are really no surprise—they were part of Biden’s platform on the campaign trail. And ambitious spending initiatives on infrastructure and America’s workers can lead to benefits in the form of economic growth.
For many small businesses, the positive news is that the president did not mention any increase in the payroll tax contributions for Social Security, where a doubling from the current level has been under consideration at higher income levels. There also was no new talk of changes to the pass-through deduction for businesses set up as S corporations and partnerships, which could be phased out at higher levels of income.
But if the pass-through treatment which allows for a 20% deduction of business income is not revised, and C corporations are subject to a higher corporate tax rate, there could be a reversal in the way small businesses incorporate in the future.
Experts suggest that S corps and partnerships could end up in an advantageous tax position relative to a C corp if the corporate tax rate does rise to 28% — if Congress settles at 25%, the math would change. But with the 20% income deduction available to pass-through entities, even with a top tax rate near-40%, the structure could be more appealing.
Eliminating the current rate on long-term capital gains for individuals with taxable income in excess of $1 million means it would go to the same level as the top ordinary income rate of 39.6%, which would be close to double the 23.8% top rate under current law and would have big implications for any sale of a business for an owner above the taxable income threshold.
The Biden administration said there will be protections for farms and family-owned businesses passing between generations, but experts say it remains unclear what specific policy details will protect these entities.
Some of the tax proposals focused on wealthy individuals will be a negative for the minority of small business owners in the highest income brackets, and many independent contractors might not have that as a top concern, but it is the PRO Act, which seeks to classify more freelancers as employees, that is the Biden policy priority widely disliked by this segment of the small business community. A recent Alignable survey found that 45% of small businesses said it would destroy their business.
There is a push and pull in other progressive policy initiatives as well. President Biden’s support for the earned income tax credit and child tax credit can benefit small businesses by alleviating wage pressure, but those benefits can be diminished when set against the president’s support for raising the federal minimum wage to $15, as well as sick and family leave benefits which can place more funding requirements on employers.
The latest proposals do provide a more complete picture of what the administration is seeking, but these multiple elements of employee benefits that can flow through to employers in the form of increased labor costs leave the small business sector, at least for now, with more questions than answers. While the general public support for Biden’s policy may focus more on the infrastructure benefits from spending, small business owners are more accustomed to looking at the cost side and being sensitive to it.
By CEO Staff
