What Trump's Tax Plan Means for Small Businesses
President Trump’s tax plan could lead to big savings for small business owners.
Not only is the White House proposing to lower the corporate tax rate from 35 percent to 15 percent, but it also plans to slash taxes for small businesses.
This includes “sole proprietors” who are self-employed, such as Uber drivers and freelancers, as well as limited liability companies and larger partnerships and corporations. Trump would also like to simplify personal income tax brackets, and eliminate the Alternative Minimum Tax, an additional levy paid by many high-income earners.
Treasury Secretary Steven Mnuchin referred to it as the “biggest tax cut and largest tax reform in the history of our country.”
But it’s unclear how much of an impact these tax cuts would have on mom-and-pop shops that are often seen as the face of the small business community.
“Small businesses should not face a higher tax rate than large corporations, which would put them at a competitive disadvantage,” says Juanita Duggan, president of the National Federation of Independent Business (NFIB).
The fight over Trump’s tax proposal is far from over. Though the White House has called for massive tax cuts, Congress could push for more steady changes.
Now that the latest efforts by Republicans to repeal or replace Obamacare have failed, political observers see an opportunity for Congress and the White House to focus on Trump's tax plan.
Although The Washington Post recently reported that the Trump plan is short on details, the administration certainly has a definitive timetable for its passage. The Post says the White House has signaled it wants the House to pass a tax overhaul in October followed by the Senate approving it in November.
Things so far in this Trump administration have yet to go that smoothely. Much like the path to a health care overhaul, only time will tell.
What small business owners can expect from Trump
Currently, most small business owners pay personal income tax rates on their business income in what’s known as a “pass-through” tax.
That means high-earners face a nearly 40 percent federal tax for any amount they make over $418,400 in 2017.
Under Trump’s proposal, the personal income tax would be simplified into three brackets, ranging from 10 percent to 35 percent. While small business owners would pay a flat 15 percent tax rate on their business income.
But only the higher echelon of small business owners make enough money to notice a big difference in taxes. A 2016 study from the Tax Policy Center found that the wealthiest 1 percent of small business owners earned more than half of small business income.
While many mom-and-pop shops already pay low rates, so they may never realize these savings.
This has led critics to suggest Trump’s tax plan would mostly benefit the wealthiest Americans, while merely paying lip service to small businesses.
Other critics fear small business owners will “game the system” by taking a lower salary for themselves and reporting most of their earnings as business income, so they qualify for the 15 percent tax rate. The Trump administration has yet to address how it would prevent this from happening.
Given that small businesses employ nearly half of America’s private sector workers, the Trump administration hopes to spur job growth with these tax cuts. But the reforms could also increase the national deficit, critics say.
Will Trump have the support of Congress?
The biggest obstacle standing in the way of Trump’s tax plan is Congress.
On the right side of the aisle, conservative lawmakers may raise concerns about increasing the deficit. The Committee for a Responsible Federal Budget, which is non-partisan, estimated the proposal would cost the government $5.5 trillion in revenue losses over the next decade.
While Democrats fear it could increase income inequality, benefiting wealthier Americans who own businesses at the expense of the middle class.
The tax reform battle could drag on through the end of the year until the White House and Congress come to an agreement.
"This isn't going to be easy,” says Gary Cohn, a former Wall Street banker who is now Trump’s chief economic adviser. “Doing big things never is.
“We will be attacked from the left and we’ll be attacked from the right, but one thing is certain: I would never, ever bet against this president. He will get this done for the American people.”