How Taxes Should Be Cut
Everybody needs and wants a tax cut, now and always. At this writing it appears that Congress will leave between $35 billion and $45 billion a year in the private sector by cutting taxes -- that's money that would have gone to the federal government. The President has legitimized the tax cut by taking the lead in cutting spending, and Congress has bought his general goal. But it is insisting on its own answers to the burning question: Which parts of the private sector will get how much of the tax cut?
No one has as good a case as small business for getting a meaningful share of tax relief. Taxes already drain its net worth and its cash flow far more than they drain that of large business. Check the figures in the table on page 64 to see just how lopsided the effect is. No group in the economy has had more government-sponsored cost burdens added to it in recent years than smaller companies. Labor-intensive small business is hit hardest by increased Social Security taxes and by the rise in the minimum wage.
Above all, small businesses are staggering under both inflation and the crippling interest rates that are allegedly designed to bring inflation under control. (See "Boyd Hill Keeps Hammering Away," page 80.)
On the other side of the equation, small business will make better and more inflation-proof use of tax cut dollars than anyone else. More of those dollars will go directly and promptly where the economy needs them most. Federal budget and program cuts will put a premium on creating entry level jobs in the private sector. Those jobs come almost entirely from small business, just as the lion's share of all new, jobs comes from new and small business.
Small companies are less likely than large ones to use tax cut money for mergers, acquisitions, or overseas plants and market development. They are more likely to use the money in ways that strengthen the most competitive part of our domestic economy. Tax cuts for small business go directly to business investment in thousands of villages, towns, neighborhoods, suburbs, and cities. Their direct and immediate impact is not limited to a few major money centers.
Focusing tax cuts on small business is not just better for small business, it's better for the whole country. In proclaiming Small Business Week last month, President Reagan used these words:
"Two centuries ago in this country, small business owners -- the merchants, the builders, the traders -- rebelled against excessive taxation and government interference and helped found this nation. Today we are working to bring about another revolution, this time against the intolerable burdens inflation, overregulation, and overtaxation have placed upon the nation's 12 million small businesses, which provide the livelihood for more than 100 million of our people.
"To revitalize the nation, we must stimulate small business growth and opportunity. Small business accounts for over 60% of our jobs, half of our business output, and at least half of the innovations that keep American industry strong. The imagination, skills, and willingness of small business men and women to take necessary risks symbolize the free enterprise foundation of the American economy and must be encouraged."
The encouragement small business most needs right now is a hefty boost to its cash flow from a fair and reasonable share of the tax cut. "fair and reasonable" to me means as much as 25% of a $40-billion tax cut. Let's assume half of the total amount will go to business. As President Reagan himself pointed out in his proclamation, small business provides the American people with more than 60% of their private sector jobs. To give it 50% of the business tax relief, or 25% of the whole package, makes sense.
That would mean a small business tax cut of roughly $10 billion. To be "fair and reasonable" within the small business sector, the cut must reach every size and kind of firm: That takes a laundry list of provisions. The best estimates we have been able to get indicate that all of the following (some in more limited form than advocates would like) can be fitted into a $10-billion package:
* Cut taxes by 8% to 10% for individuals, which will help sole proprietors and partners;
* Graduate the corporate tax rate up to $250,000 in earnings and don't reduce the top rate of 46% until taxes are graduated up to $500,000 in earnings;
* Cut the capital gains tax rate from 28% to 20%, with a further cut to 10% for gains made from investments in small business and held for five years;
* Defer the capital gains tax if the proceeds of a small business investment gain are reinvested in another small firm within 18 months and forgive the capital gains tax if an over-55 owner-manager sells his own business or his interest in one and the business continues to be independent;
* Increase to $600,000 the marital deduction (exemption) for estate taxes;
* Reform the rules for accelerated capital cost recovery by immediate expensing of the first $25,000 invested in new assets, and institute a less costly version of 10-5-3, probably 2-4-7-10-15;
* Increase used-equipment purchases eligible for the investment tax credit from $150,000 to $250,000;
* Allow small businesses to use LIFO inventory accounting;
* Increase the accumulated earnings credit;
* Permit small businesses to use cash accounting.
Various bills have been introduced to do one or more of these things.All of the significant measures have (or will have) bipartisan support. Twenty-three senators, for example, have joined Senators Weicker (R-Conn.) and Nunn (D-Ga.) in sponsoring one bill. Senator Long (D-La.) had the support of all but one member of the Senate Finance Committee for a similar bill in the last Congress. Senator Bentsen (D-Tex.) is sponsoring a "core" bill designed to help unify support. Senators Wallop (R-Wyo.) and Moynihand (D-N.Y.) are sponsoring a bill to reduce estate taxes. Representatives Dreier (R-Calif.) and Nowack (D-N.Y.) have joined Representatives Heftel (D-Hawaii) and Archer (R-Tex.) in pushing a bill with several of these provisions.
INC. is making its first real effort to help small business to follow what happens to its part of a tax bill. (See "The 1980 Tax Cut: A Tilt to Big Business?", page 56.) Whatever your views are, this is the time to let the right people in Congress know about them. Your own congressmen and senators are the best people to write to or meet with. Others who will be important are listed below. If you can't be bothered with the details of tax legislation, don't let that stop you. Just explain why you need a good strong small business tax cut bill. Make sure your trade association is working with small business groups.
Every federal tax bill is a moment of truth in the life of our country. All the cloudy political pap gives way to hard facts and harder numbers. Now you can figure out who's really for small business, and who's just playing the "hugger-mugger game" -- hug 'em in the public speeches and letters to constituents; them mug 'em in the committee and conference sessions.
The 97th Congress must not pass the small business buck, it must pass the bill, the best small business tax bill we have ever had.