The Democrat Party's War on Small Business

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Posted by Americans for Tax Reform on Thursday, April 22nd, 2021, 8:00 AM PERMALINK

PRO ACT

The PRO Act is a central component of the left's crusade against American workers and small businesses: 

The PRO Act Bans Right to Work Laws Nationwide

  • Right to Work laws prohibit employers from forcing their employees to join a union or pay union dues as a condition of employment. Existing Right to Work laws protect 166 million Americans in 27 states, more than half the U.S. population. 
     
  • Research shows that Right to Work states experience stronger growth in the number of people employed, growth in manufacturing employment, and growth in the private sector than states run by union bosses. 
     
  • According to the National Institute for Labor Relations Research, the percentage growth in the number of people employed between 2007-2017 in Right to Work states was 8.8% and 4.2% in forced-unionism states. Growth in manufacturing employment between 2012-2017 in Right to Work states was 5.5% and 1.7% in forced-unionism states. The percentage growth in the private sector from 2007-2017 in Right to Work states was 13.0% and 10.1% in forced-unionism states.
     

The PRO Act Limits Opportunities To Work With Freelancers and Independent Contractors

  • The PRO Act implements California’s disastrous “ABC” test for independent contractors, which forced the mass reclassification of California’s freelancers, causing them to flee the Golden State to chase their dreams and earn a living. The ABC test goes far beyond federal guidance for independent contractors. 
     
  • Under the ABC test, businesses must prove that a contractor is doing duties “outside the usual course of work of the hiring entity” and that “the worker customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.” This significantly limits the ability of businesses to retain contractors who may operate within the scope of work sometimes performed by employees in similar circumstances. It’s an unnecessary distinction that prohibits most businesses from working with independent contractors.
     
  • The ABC was widely unpopular among California’s independent contractors, over 90 percent of whom opposed Assembly Bill 5 before Governor Gavin Newsome signed it into law. ATR has compiled 655 personal testimonials from independent contractors who details the ways that AB5 has hurt them, which you can view here
     
  • If the PRO Act is passed into law, the livelihoods of more than 59 million independent contractors across the country will be at risk.
     

PRO Act Forces Employers to Hand Over Sensitive Employee Contact Information to Union Organizers

  • The PRO Act forces employers to turn over private employee contact information - such as home addresses, email addresses, and personal phone numbers - to union bosses during organization drives. This would open workers to union intimidation and harassment. 

ELIMINATION OF STEPPED UP BASIS: A SECOND DEATH TAX

President Biden and the Democrats vow to target small businesses and individuals with a new Death Tax: They will eliminate step-up in basis. This will impose a steep tax increase and paperwork nightmare for small businesses, farms, and families. It will also violate his own pledge against raising any tax on any American making less than $400,000. In this video, you can see a sample of the many times Biden has threatened to eliminate step-up in basis.

Elimination of stepped up basis would impose an automatic capital gains tax at death -- separate from, and in addition to -- the Death Tax.

In a Forbes piece titled "This Biden Tax Hike Hike Will Hit Mom & Pop Hard" tax lawyer Robert W. Wood writes:

Under current tax law, assets that pass directly to your heirs get a step-up in basis for income tax purposes. It doesn’t matter if you pay estate tax when you die or not. For generations, assets held at death get a stepped-up basis—to market value—when you die. Small businesses count on this.

Wood notes:

Biden's proposal would tax an asset's unrealized appreciation at transfer. You mean Junior gets taxed whether or not he sells the business? Essentially, yes. The idea that you could build up your small business and escape death tax and income tax to pass it to your kids is on the chopping block. Biden would levy a tax on unrealized appreciation of assets passed on at death. By taxing the unrealized gain at death, heirs would get hit at the transfer, regardless of whether they sell the asset.

As reported previously by CNBC:

“When someone dies and the asset transfers to an heir, that transfer itself will be a taxable event, and the estate is required to pay taxes on the gains as if they sold the asset,” said Howard Gleckman, senior fellow in the Urban-Brookings Tax Policy Center. 

In its analysis of Biden's tax plan, Tax Policy Center says the step-up in basis proposal mirrors a proposal described in an Obama-Biden 2016 Treasury Department document. This document confirms that Biden will force a capital gains tax payment immediately upon transfer of an asset after death of a loved one:

Under the proposal, transfers of appreciated property generally would be treated as a sale of the property. The donor or deceased owner of an appreciated asset would realize a capital gain at the time the asset is given or bequeathed to another.

The amount of the gain realized would be the excess of the asset's fair market value on the date of the transfer over the donor's basis in that asset. That gain would be taxable income to the donor in the year the transfer was made, and to the decedent either on the final individual return or on a separate capital gains return.

CONGRESS ELIMINATED STEPPED UP BASIS IN 1976 BUT IT WAS SUCH A DISASTER IT WAS REPEALED

In 1976 congress eliminated stepped-up basis but it was so complicated and unworkable it was repealed before it took effect because it was an impossible-to-overcome compliance burden.

As noted in a July 3, 1979 New York Times article, it was "impossibly unworkable":

Almost immediately, however, the new law touched off a flood of complaints as unfair and impossibly unworkable. So many, in fact, that last year Congress retroactively delayed the law's effective date until 1980 while it struggled again with the issue.

As noted by the NYT, intense voter blowback ensued:

Not only were there protests from people who expected the tax to fall on them -- family businesses and farms, in particular -- bankers and estate lawyers also complained that the rule was a nightmare of paperwork.

A DOUBLED CAPITAL GAINS TAX, HIGHEST SINCE JIMMY CARTER IN 1977

Biden vows to impose capital gains tax increases just as America digs out from the pandemic. He said "every single solitary person" will pay capital gains taxes at ordinary income tax rates. Biden wants to take the current capital gains tax rate of 20 percent and double it to 39.6 percent, highest since Jimmy Carter in 1977 when the highest possible capital gains rate was 39.875 percent.

Here is the documentation of Biden's threatened capital gains tax hike:

On Oct. 23, 2019 Biden said: “So every single solitary person, their capital gains are going to be treated like real income and they are going to pay 40 percent on their capital gains tax."

On Sept. 27, 2019 Biden said: “I’m gonna double the capital gains rate to 40 percent."

On Aug. 21, 2019 Biden said“The capital gains tax should be at what the highest minimum tax should be, we should raise the tax back to 39.6 percent instead of 20 percent."

Video documentation of the above statements can be found here: How High Will Biden Raise Your Capital Gains Taxes?

In 2012, Vice President Biden and President Obama succeeded in their push to let the capital gains tax rate rise to 20 percent (from the Bush-era rate of 15 percent.)

Biden and Obama then piled on another 3.8 percent capital gains tax hike -- the Net Investment Income Tax -- one of the many tax increases in Obamacare. The 3.8 percent tax hike took effect Jan. 1, 2013, purposefully timed to kick in *after* the 2012 election.

Some taxpayers under Biden will face a capital gains tax rate over 50 percent, when combined with state capital gains taxes. California's 13.3 percent state capital gains rate means Golden State taxpayers will face a rate of 56.7 percent (39.6 + 3.8 + 13.3 = 56.7%).

So what ever happened to the high capital gains rate under President Carter? In 1978 he wanted to raise the rate even higher. But there was a backlash from middle class households around the country, from Democrats and Republicans alike. It was so fierce, Carter was forced to relent and ended up signing a capital gains tax cut.

As recounted by Mark Bloomfield in the Wall Street Journal:

But the year was 1978, the push for a tax hike came from President Jimmy Carter, and the tax in question was on capital gains. Mr. Carter wanted to tax capital gains at the same rate as ordinary income -- effectively doubling the rate for many taxpayers.

He didn't get his tax hike, but he did spark a pro-growth insurgency that reframed the tax debate.

The chief insurgent was Republican Rep. Bill Steiger of Wisconsin, who called for cutting the top capital gains tax rate almost in half. From its inception, the 1978 "Steiger amendment" won bipartisan support. In the Senate, Democrat Russell Long (then chairman of the tax-writing committee), Alan Cranston (the second-ranking Democrat) and Republican Clifford Hansen signed up 59 Democrats and Republicans to co-sponsor legislation to cut capital gains taxes.

Within weeks, political and popular support turned in favor of the tax cuts as more people acknowledged that lowering the rates would reward the middle class for saving and investing, not just "fill the pockets of fat cats."

What prompted this unexpectedly strong support for lower taxes on capital gains? The tax on capital gains may have been seen as a tax on the rich by some in Washington, but most Americans saw it differently. People believe in the American Dream, the old-fashioned Horatio Alger rags-to-riches story. A tax on capital gains is a tax on the hard work and risk-taking people undertake to build their own wealth.

Mainstream economists know that lower capital gains taxes result in lower capital costs, more saving and investment, and a stronger economy. And ordinary citizens understand that low taxes on capital gains can make it possible for them to buy a new lathe or the newest software, which will give them the chance to compete effectively in today's global economy. Retirement security is also at stake. Low taxes on capital gains allow Americans to build up larger nest eggs.

DEMOCRATS IMPOSED NEW 1099 PAPERWORK REQUIREMENTS

Democrats snuck through new reporting requirements that will increase tax complexity for independent contractors, small businesses, and freelancers. This was part of the recently-enacted "stimulus" bill as another attempt by the Left to exploit the pandemic by passing unrelated policy measures long desired by progressives.

The provision lowered the reporting threshold to $600 or more for 1099-K reporting and eliminated the transactions threshold. Previously, Americans were only required to report when there were more than $20,000 in sales and more than 200 transactions in a year. The provision also extends the 1099-K reporting to "specified electronic payment processors."

This will burden low- and middle-income contractors, small businesses, and freelancers, many of which have been devastated by the coronavirus pandemic. Implementing new, burdensome reporting rules will only do more damage.

Democrats last enacted burdensome new 1099 reporting requirements in Obamacare, when they required businesses to send 1099 forms for all purchases of goods and services over $600 annually.

Soon after this provision was signed into law, the National Taxpayer Advocate raised concerns that these reporting requirements would cause “disproportionate” harm to small businesses and do little to improve tax compliance.

This provision was so unpopular that it was quickly repealed in 2011 with a bipartisan vote of 87 to 12 in the Senate and 314 to 112 in the House. The Obama administration even hailed repeal of the provision a “big win” for small businesses in a press release:  

“Today, President Obama signed a law that removes the expanded ‘1099’ reporting requirement from the Affordable Care Act. This is a big win for small businesses.

The SBA and President Obama supported repealing this provision, which would have required businesses to send 1099 forms for all purchases of goods and services over $600 annually. With this bipartisan effort, we have removed a requirement that would have been an undue barrier to small business growth.”

Increasing compliance costs and the regulatory burden on already-struggling workers and small business owners is especially alarming given they have been disproportionately harmed by the pandemic.

CORPORATE TAX RATE HIKE WILL DIRECTLY RAISE UTILITY BILLS FOR SMALL BUSINESSES -- ELECTRIC, GAS, WATER BILLS

If Democrats increase the corporate income tax rate, they will have to explain why they just increased the utility bills of households and small businesses which typically operate on tight margins, with considerable heating, cooling, gas, and refrigeration costs.

Customers bear the cost of corporate income taxes imposed on utility companies. Corporate income tax cuts drive utility rates down, corporate income tax hikes drive utility rates up.

Electric, gas, and water companies must get their billing rates approved by the respective state utility commissions. When the 2017 Tax Cuts and Jobs Act cut the corporate income tax rate from 35% to 21%, utility companies worked with officials to pass along the tax savings to customers

Many Americans benefited from lower electric bills, lower gas bills, and lower water bills. ATR collected over 140 examples nationwide here and you may view a compilation of local television reports here.

Example 1:
 
“The tax law will result in lower bills for our customers and lower taxes for Pepco,” said Dave Velazquez, President and CEO, Pepco Holdings, which includes Pepco. – Jan. 5, 2018 Pepco press release


Example 2:

The legislation cuts the federal corporate income tax rate from 35% to 21% effective January 1, 2018. This tax cut, in turn, reduces the cost of service for many of Virginia’s major electric, gas and water utilities.  – January 8, 2018, Virginia SCC Press Release

Example 3:

The Arizona Corporation Commission is following through on its promise to pass savings created by the Tax Cuts and Jobs Act to Arizona utility ratepayers. As of August, the effort has totaled $189,088,437.- August 24, 2018 Arizona Corporation Commission press release

Example 4:
 
The Pennsylvania Public Utility Commission (PUC) today issued an Order, requiring a “negative surcharge” or monthly credit on customer bills for 17 major electric, natural gas, and water and wastewater utilities, totaling more than $320-million per year. The refunds to consumers are the result of the substantial decrease in federal corporate tax rates and other tax changes under the Tax Cuts and Jobs Act (TCJA) of 2017, which impacted the tax liability of many utilities. -- May 17, 2018 Pennsylvania Public Utilities Commission Press Release
 
Conversely, if Biden and the Democrats raise the corporate tax rate, Americans will see their utility rates increase. Democrats will get to explain why they imposed higher utility rates on their constituents as the country tries to dig out from the pandemic.
 

HIGHER CORPORATE RATE WILL HIT SMALL BUSINESSES ORGANIZED AS SCHEDULE C

According to the Congressional Research Service, "The majority of both corporations and pass-throughs in 2011 had fewer than five employees (55% of C corporations and 64% of pass-throughs). Nearly 99% of both corporations and pass-throughs had fewer than 500 employees, the most common employment-based threshold used by the Small Business Administration (SBA)." For reference, Amazon has one million employees and Walmart has 2.2 million employees.

The most dire effects of a corporate tax hike would be felt by smaller businesses that Biden has claimed to be a champion for. It would also have severe consequences on workers' wages and the economy as a whole. 

Joe Biden’s tax hikes would eliminate one million jobs in the first two years, according to a new study by economists John W. Diamond and George R. Zodrow. The study, which was commissioned by the National Association of Manufacturers also found that the tax hikes would eliminate 600,000 jobs per year over the first decade and reduce GDP by $117 billion in the first two years. 

The study assumed several Biden tax hikes would go into effect include raising the corporate tax rate to 28 percent, reinstating the corporate alternative minimum tax, eliminating most expensing of depreciable assets, repealing the 20% deduction for pass-through businesses, doubling the tax rate on capital gains and dividends, taxing unrealized capital gains at death, and increasing the top individual tax rate to 39.6 percent.  

Biden’s tax hikes will reduce new investment and decrease capital in both the short and long term. As the study notes:

Investment in ordinary capital declines initially (two years after enactment) by 1.9 percent, by 1.3 percent ten years after enactment, and by 1.6 percent in the long run; this effect is only modestly affected by imports of ordinary capital into the United States, which increase in the long run by 0.2 percent. 

The increase in the statutory corporate income tax rate results in a reallocation abroad of FSK, which declines initially by 2.7 percent, by 3.5 percent 10 years after enactment, and by 2.9 percent in the long run. 

This reduction in investment and capital will not only have detrimental effects on the U.S. economy, it will also harm workers due to a decrease in household wages. As the study notes: 

The decline in the stocks of ordinary capital and FSK gradually reduce the productivity of labor over time and thus real wages, which fall by 0.6 percent in the long run, while labor compensation falls by 0.6 percent initially, by 0.3 percent ten years after enactment, and by 0.6 percent in the long run… 

These effects translate into a reduction of $638 in wage income per household… 

The study also notes that Biden’s tax hikes will cost jobs each and every year after enactment: 

The declines in hours worked would be equivalent to declines in employment of approximately just over 1.0 million FTE jobs two years and five years after enactment, and a decline of 0.1 million FTE jobs ten years after enactment. 

In terms of the duration of the reduction in employment over the first ten years after enactment, the average annual reduction in employment would be equivalent to a loss of roughly 600,000 jobs, or 5.7 million total “job years” lost over the ten-year interval. 

Other studies, on average, show that labor (or workers) bear an estimated 70 percent of the corporate income tax in the form of wages and employment, as ATR notes here.

There is abundant evidence that corporate tax hikes lead to lower investment and employment: 

  • A Treasury Department study estimated that “a country with a 1 percentage point lower tax rate than its competitors attracts 3 percent more capital.” This is because raising the corporate rate makes the United States a less attractive place to invest profits.
  • According to the Stephen Entin of the Tax Foundation, labor (or workers) bear an estimated 70 percent of the corporate income tax in the form of wages and employment. As Entin notes, 50 percent70 percent, or even 100 percent of the corporate tax is borne by workers.
  • A 2012 Harvard Business Review piece by Mihir A. Desai notes that raising the corporate tax lands “straight on the back” of the American worker and will see a decline in real wages. 
  • A 2012 paper at the University of Warwick and University of Oxford found that a $1 increase in the corporate tax reduces wages by 92 cents in the long term. This study was conducted by Wiji Arulampalam, Michael P. Devereux, and Giorgia Maffini and studied over 55,000 businesses located in nine European countries over the period 1996-2003.  
  • Even the left-of-center Tax Policy Center estimates that 20 percent of the burden of the corporate income tax is borne by labor. 

 

MARGINAL INCOME TAX RATE INCREASE WILL HURT PASS-THROUGH BUSINESSES

From the Tax Policy Center:

"In 2017, individuals reported about $1.03 trillion in net income from all types of pass-throughs accounting for 9.3 percent of total AGI reported on individual income tax returns."

According to the Congressional Research Service, "The majority of both corporations and pass-throughs in 2011 had fewer than five employees (55% of C corporations and 64% of pass-throughs). Nearly 99% of both corporations and pass-throughs had fewer than 500 employees, the most common employment-based threshold used by the Small Business Administration (SBA)." For reference, Amazon has one million employees and Walmart has 2.2 million employees.

Of the 26 million businesses in 2014, 95 percent were pass-throughs, while only 5 percent were C-corporations.

Businesses organized as pass-through firms don’t pay taxes themselves. Instead, the profits of the business “pass through” to the owners who pay individual taxes on their 1040 form. Sometimes, this means that pass-throughs pay a higher rate than corporations, exceeding 50 percent in some states.

For many small businesses or startups, a rise in the top marginal income tax rate could result in a significant competitive disadvantage that makes it harder to compete with businesses organized as corporations.

Joe Biden also wishes to repeal the 20% deduction for pass-through businesses that the TCJA implemented, which could mean even more hardship for small businesses organized as pass-throughs.

DEATH TAX IS BAD TAX POLICY, SHOULD BE REPEALED, HURTS JOB CREATION AND ECONOMIC GROWTH, IS EXTREMELY UNPOPULAR
 
The Death Tax is fundamentally unfair and its bad tax policy. It is levied on assets that have been taxed previously through income taxes, capital gains taxes, and the corporate income tax. 

It disproportionately impacts family-owned businesses like farmers and ranchers especially that tend to be asset rich but cash poor. On the other hand, the wealthy often evade the tax through loopholes and armies of lawyers and accountants. 

The Tax Cuts and Jobs Act of 2017 made key progress toward repealing the Death Tax by doubling exemption from $5.5 million to $11 million. Unfortunately, because of arcane senate rules, this tax cut expires in 2025.

Moving forward, the Death Tax should be permanently repealed. While conservatives in Congress support repeal of the Death Tax, Democrats want to dramatically increase the size and scope of the Death Tax.

For instance, Senator Bernie Sanders (I-Vt.) has proposed nearly doubling the death tax to 77 percent in his new Estate Tax Plan, returning the death tax to levels unseen since the 1970s. President Joe Biden has expressed interest in reducing the current exemption for individual’s eligibility of transfer from $11.7 million to $3.5 million for estates.

Repealing the death tax would stimulate job creation and grow the economy. Numerous studies have found that repealing the death tax would grow the economy. For instance, a 2017 study by the Tax Foundation found that the US could create over 150,000 jobs by rolling back the estate tax.

Similarly, a 2012 study by the Joint Economic Committee found that the death tax has destroyed over $1.1 trillion of capital in the US economy, which results in fewer jobs and lower wages. Much of this economic damage hits small businesses, which are the core of America’s economy and have been disproportionately harmed by the Coronavirus pandemic. The economic growth created by repealing the Death Tax would produce $221 billion in federal revenue because of increased wages and more jobs.

The Death Tax is extremely unpopular. Numerous studies have found that majority of Americans oppose the Death Tax and support its repeal. For instance, a recent report by NPR found that 76 percent of Americans support full, permanent repeal of the Death Tax.  

Repeal of the Death Tax would spur economic growth, create jobs, and increase wages. It would end double taxation and help family-owned businesses across the country.

JOE BIDEN PROPOSES LAW REQUIRING BANKS TO REPORT PRIVATE ACCOUNT INFORMATION TO THE IRS

As part of an $80 billion expansion in IRS funding, Joe Biden has proposed greatly expanding the power of the agency, by allowing it access to the private bank account information of taxpayers. According to the Wall Street Journal

"The Treasury Department’s career staff estimates that more than half of the $700 billion in additional revenue would come from changes to how businesses’ and individuals’ income is reported to the government, the people said. Under the plan, banks and other payment providers would be required to tell the IRS how much money came into and out of individuals’ and businesses’ accounts each year, going far beyond the existing reporting of interest income.

That change wouldn’t require individuals and business owners to file any additional forms, and it wouldn’t provide the IRS with direct information about what someone’s tax liability should be. Business owners trying to hide income could still attempt to use cash or cryptocurrency, both areas that the IRS has struggled to police.

But the change to the information-reporting rules would give the IRS much more information about business income as it decides who to audit. It would also create an enormous flow of information that the IRS would have to learn how to manage and use."

This mandate puts private information of both individuals and businesses at risk. Given the IRS's history of mismanagement and abuse, this is particularly concerning. 

  

Photo Credit: Gage Skidmore

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