Today, President Obama will finally sign into law legislation providing tax credits and a lending facility to small businesses, after Republicans in the Senate obstructed it for months. Even when it finally came to the floor, all but two Senate Republicans and one House Republican voted against the bill.
At the same time, though, Republicans are trying to portray themselves as advocates for the country’s small business community, through their desire to extend the Bush tax cuts for the rich and because of a plank in their “Pledge to America” that would provide a 20 percent tax deduction on business income.
It’s already been well-documented how the Bush tax cuts for the rich affect less than two percent of small businesses, and that the GOP’s definition of small business includes behemoths like the Bechtel Corporation, the Tribune Company, and PricewaterhouseCoopers. But is their Pledge proposal any better?
“What we’re really talking about is a 20 percent deduction immediately on the bottom line of every small- business owner and family farmer in America,” said Rep. Mike Pence (R-IN). However, as CAP economist Christian Weller found, “the proposal is an ‘upside-down’ tax break that gives the largest benefits to those who already have the highest incomes”:
A deduction reduces the taxable income and thus the taxes that somebody has to pay. A business owner with lots of business and other income will thus get a government subsidy of 35 cents for each dollar in deduction, while a small business owner in the 15 percent tax bracket will get 15 cents for each dollar in deductions…Larger businesses could easily use this windfall to outcompete smaller businesses. A larger business owner with a 35 percent marginal tax rate will get a benefit that is 133 percent greater than the benefit that a smaller business owner with a 15 percent marginal tax rate gets for each dollar in tax deduction.
This tax break for business income would be worth more to those paying in the highest marginal tax brackets, as it’s calculated according to the marginal rate paid. So Bechtel and the Tribune Company would be given a much larger break than the owner of a hardware store or dry cleaner who is paying in the 15 percent income tax bracket.
The way to avoid this inequity is to craft tax breaks as credits, thus giving the same amount to businesses across-the-board. But the deduction sought by House Republicans would exacerbate already existing inequities that advantage large business over small, as well as dropping a windfall into the laps of wealthy business owners who certainly don’t need it.