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Op-Ed: Democratic tax plan will squeeze
small businesses
[The Center Square] Rea S. Hederman
Jr. | RealClearPolicy
Democrats in Washington are looking to
bolster their tax-and-spend reputation as they try to pass an
“infrastructure” package currently slated to cost taxpayers roughly $3.5
trillion in spending and untold sums in tax increases to “pay” for it.
Corporate tax hikes along with higher cigarette and income taxes have
been proposed to offset some of the spend-a-thon. But although some of
the new tax proposals have made headlines, others have garnered less
attention than they deserve.
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 The Democratic drive to raise the federal corporate income tax
from 21% to 26.5%, for example, has been widely reported, while the tax hikes
proposed for small businesses, such as S-corporations and partnerships, have
not. Reports have focused more on Wall Street than Main Street even though small
businesses and partnerships comprise the majority of America’s businesses and
Main Street will shoulder a heavier new tax burden than their Wall Street
competitors under the new Democratic tax plan. But neither set of tax increases
will be good for U.S. businesses or consumers.
American C-corporations currently pay a flat 21% federal tax on
their profits. Congressional Democrats want them to pay 26% – one of the highest
corporate tax rates in the world. American small businesses, S-corporations, and
partnerships, however, pay taxes according to the progressive income tax scale –
with a top individual tax rate that would increase to over 40% under the
congressional Democrats’ tax plan.
As U.S. businesses – big and small – continue to recover from the pandemic’s
stifling economic effects, this is no time to hit them with higher taxes.
International economists recommend reducing corporate and capital taxes because
they do the most damage, and many states along with much of the industrial world
have moved to reduce corporate taxation precisely because lower taxes encourage
business growth, hiring, innovation, and higher wages.
 But Democrats in Washington think they know better and want to make some of
America’s small businesses and partnerships the most heavily taxed businesses on
the planet. That misguided hubris will threaten jobs and prosperity across the
country.
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Midwestern states like Ohio, for instance, have
strategically reduced their tax burdens to help small businesses
grow and compete with larger corporations. Some state policymakers
understand that fledgling companies not only create new jobs and
spur economic opportunities, but they need to retain their working
capital to do it. Syphoning even more small business money to
Washington, even from more established firms, undermines those
efforts.
Perhaps congressional Democrats need a refresher on how corporate
taxes work in the real world. Federal corporate tax increases will
either be passed along to consumers through higher wholesale and
retail prices, or else leave businesses with fewer dollars to invest
in their workers or grow their operations. Either way, American
prosperity will suffer under the Democrats’ tax-and-spend proposal.
And so will their competitive advantage. As other
countries reduce their corporate tax burdens, their companies can
lower prices to attract new customers and pay higher wages to
attract new workers – all at the expense of American companies
trying to compete in a global market.
Some states have worked hard in recent years to grow their economies
and recover from the Great Recession by reducing the tax burdens
faced by small businesses. Congress and the Biden Administration
seem poised to negate those laudable efforts with one of the largest
corporate tax hikes in American history – and many small businesses
and their employees may be completely unaware that it’s coming, and
that they and their customers will pay the price.
Rea S. Hederman Jr. is executive director of the
Economic Research Center and vice president of policy at The Buckeye
Institute in Columbus, Ohio. |
