No matter which party is in power, I’m always nervous when they start meddling with the tax code. Everybody agrees that we need tax reform; it’s just that we can seldom get two people to agree on just how that reform should look. If you ask three members of Congress, you’ll get at least five answers.
The “tax cut” bill currently before the Senate dramatically favors large corporations over the middle class and small business. As Gary Cohn, President Trump’s Chief Economic Advisor, said, “When you talk to all the CEOs — they’re the most excited about this.”
Why Is That?
The bill, as currently worded, gives large corporations huge permanent tax cuts. At the same time, it lulls small businesses into complacency with a temporary text cut that does not seem to apply to sole proprietor ships. So if you own your own business without incorporating into an LLC or something similar, your income is still taxed as regular income. But if you generate your income through a pass-through entity, such as an LLC, your income from that entity is taxed at the corporate rate—but only through 2025.
The proposed structure lays the groundwork for future consolidation by the middle of the next decade when those tax cuts for small businesses and the middle class go away. Large corporations will continue to enjoy their tax cuts, leaving the playing field even more tilted in their favor. To get the lower tax rate after then, you’ll probably need a C or S corporation, and that brings back the whole “double taxation” argument that led to the creation of LLCs as pass-though entities in the first place.
It’s unclear whether small businesses are the epic job creators their advocates claim. But small business pay “67% more to comply with the tax code than larger firms” than do large corporations who can afford the army of bookkeepers, tax accountants, and attorneys it takes to successfully navigate our cumbersome tax code. For example, Hermit Haus has only Mandi and me in the back office keeping the company’s finances accounted for, and we each have other responsibilities. We do have an accounting firm that we pay handsomely, but we have to do the work of getting the records ready for them.
What Will They Do with the Money?
One the other hand, when Cohn asked a room full of CEOs if the current legislation would encourage them to increase investment (and theoretically create more jobs), only a few indicated they would. This tepid response points to the flaw in the “trickle-down” model—Cohn’s characterization of the legislation, not mine. Cutting corporate tax rates does not encourage companies to reinvest in America. Big corporations use the tax savings for stock buybacks and shareholder dividends—not R&D, expansion, or other means of job creation. Both of these actions increase the value of the company for its shareholders—and that’s a good thing—but neither directly contributes to the economy or creates jobs.
Why Do I Care?
In the real estate redevelopment business, we need a healthy middle class and small business owners to buy our houses and turn a profit. You can’t sell a $300-thousand house to a family making entry-level wages. We could continue to invest in rental properties, but sooner or later we’ll run out of investment cash. A healthy real estate sector requires a healthy middle class. A healthy middle class requires small businesses to be successful.
And to be fully honest, I plan to take full advantage of the tax reduction on pass-through income—while it lasts. Keeping this deduction through 2025 gives me plenty of time to divest and ease back into retirement. But what about the young folks just getting started in real estate and other small businesses?
Take time to read about the “Cut Cut Cut” plan as it goes through Congress—even if the actual bills are written in Congressionalese, which is two steps removed from Legalese, a language only distantly related to English. Choose a variety of sources: you’ll find plenty who support my assessment here and plenty who support the plan as written. Follow the money. Figure out for yourself whether you’ll benefit from the plan or be harmed by it. But the important thing is to get your information from a variety of sources, not all of whom you automatically agree with.
Make up your own mind. Then get in touch with your Senators and Representatives and let them know how you think. Let them know that their actions determine how you vote.