Tax Reform and Small Business

Comments for the Record

United States House of Representatives

Committee on Ways and Means

Tax Policy Subcommittee

Tax Reform and Small Business:

Growing Our Economy and Creating Jobs

Wednesday, May 23, 2018, 10:00 A.M.

By Michael G. Bindner

Center for Fiscal Equity

Chairmen Brady and Buchannan Ranking Members Neal and Doggett, thank you for the opportunity to comment on the new tax law.

The Brookings-Urban Tax Policy Center looked at the distribution of benefits of the new tax law. It found that they mostly went to the highest income taxpayers. The small businesses most likely to benefit are on Wall Street, not Main Street. This will have little impact on services in the lower Manhattan area, since these cuts are unlikely to affect consumption on meals and entertainment in the area, which is also priced at the high end. It may impact real estate and personal services spending in the Greater New York area, but again, these areas are not particularly suffering.

The plurality of small businesses are not high income. Indeed, they are actually 1099 employees whose income tax rates are far below the special rates for Pass Through businesses. Real tax reform would have given the clients of these individuals an incentive to hire them full-time with benefits. I suspect that the new law did the reverse.

We are on record predicting that enactment of the Fiscal and Job Cuts Act (not a typo) will restrict wages and cause other labor cost savings so that executives can cash in on the lower tax rates by earning higher bonuses. This means more cost cutting and 1099 employment, which is not as good for the employee as full-time statutory employment.

Small businesses will gain more from increased federal spending in the Two-Year Omnibus appropriation. They will spend money from government spending and spur the economy. None of that have come from tax cuts.

The two-year Omnibus will eat up most of the effect of the tax cut on the economy, which will now have a negative relationship between deficits (net of net interest, which controls for matching injection to the financial markets from federal borrowing) and economic growth, meaning deficits are good. The closest available curve showing that model are the Bush years, so given the current deficit size, the predicted growth rate in about a year (it takes time to obligate money and pay bills) should be around 3.3% or higher.

We remind the Committee that in the future we face a crisis, not in entitlements, but in net interest on the debt, both from increased rates and growing principal. This growth will only feasible until either China or the European Union develop tradeable debt instruments backed by income taxation, which is the secret to the ability of the United States to be the world’s bond issuer. While it is good to run a deficit to balance out tax cuts for the wealthy, both are a sugar high for the economy. At some point we need incentives to pay down the debt.

The national debt is possible because of progressive income taxation. The liability for repayment, therefore, is a function of that tax. The Gross Debt (we have to pay back trust funds too) is $19 Trillion. Income Tax revenue is roughly $1.8 Trillion per year. That means that for every dollar you pay in taxes, you owe $10.55 in debt (although this will increase). People who pay nothing owe nothing. People who pay tens of thousands of dollars a year owe hundreds of thousands.

The answer is not making the poor pay more or giving them less benefits, either only slows the economy. Rich people must pay more and do it faster. My child is becoming a social worker, although she was going to be an artist. Don’t look to her to pay off the debt. Your children and grandchildren and those of your donors are the ones on the hook unless their parents step up and pay more. How’s that for incentive?
Those small businesses from Wall Street, et al who are in high income tax brackets will be the ones paying back the debt in the future. It would have been better to simply not have raised their taxes.
Thank you for the opportunity to address the committee.  We are, of course, available for direct testimony or to answer questions by members and staff.