Dems Go After a Main Street Necessity, Not a Wall Street Loophole

Small business owners have always had it tough — making payroll, dealing with customers, and of course, writing a large check to Uncle Sam at the end of the year — but this year inflation is making things particularly hard. Yet somehow, Senate Democrats think kicking these people while they’re down is a good plan. 

There’s growing traction among Senate Democrats to put in place a new tax on pass-through entities to help pay for Biden’s Build Back Better plan. While advocates claim that expanding the small business tax is “closing loopholes,” the reality is that this would result in a tax increase on the vast majority of Main Street shops. According to the Tax Foundation, over 90% of American businesses are set up as pass-through entities. That is, income is reported on the tax return of the business owner, rather than paying a separate corporate rate.

This new tax would hurt small businesses that are already struggling under current record levels of inflation. It’s a horrible plan.   

Ninety one percent of small business owners recently reported concern about inflation to the National Federation of Independent Businesses. Fifty six percent of small business owners reported that it has had a substantial impact, while 35% report a moderate impact. In the survey data released on July 20, 2022, three-quarters said that inflation pressure is still worsening. Only 1% indicated that it was getting better.

This, of course, comes not long after the pandemic-related shutdowns of 2020 and mandates of 2021. According to the Federal Reserve, 200,000 extra American businesses shut down in 2020 as a result of the pandemic.

The tax proposal would make things so much worse. It fails to distinguish between business income, which is often mostly re-invested into the business, and take-home pay. As a result, business owners might be on the hook to pay taxes on gross profit, instead of the net proceeds. It doesn’t matter that they had to spend a large chunk of their profits on rent, payroll, and employee benefits; those expenses are taxed all the same. 

President Biden will no doubt make the case that he is sticking with his promise not to raise taxes on those making less than $400,000 annually. That’s disingenuous at best. In its actual application, the tax would hurt middle class entrepreneurs across the states. 

Let’s say there is Main Street Diner, owned by Erica. Erica’s Diner makes $400,001 a year. After paying  $50,000 to each of her four employees, and $30,000 to two others, $2,500 a month in rent for her shop front, and another $2,500 a month in supplies and products, Erica’s personal income comes out to $80,000 a year — not bad, but a far cry from the $400,000 consistently repeated by the Biden Administration. 

But under the proposed plan Erica would be considered part of the “top 1%” that needs to pay the additional tax on top of typical income tax and self-employment tax.

While some are claiming that putting down this rigid tax on pass-through entities is closing a loophole, it’s clear that this is not a loophole. Millions of American businesses, just like Erica’s Diner, rely on the passthrough tax treatment, and rightfully so. While Erica can be proud of the local staple she has built up and the jobs she has created, it is preposterous to imply that she is wealthy, or that she is not a member of the middle class.

There are over 30 million businesses in the United States. Over 90% of them are pass-through entities. These companies are the backbone of our nation. While Joe Biden might want to raise taxes on Amazon or other multinational corporations, this is clearly not the way to do it. Publicly listed companies are not pass-through entities.

Joe Biden, this is not a Wall Street loophole, this is a Main Street necessity. After all the trials and tribulations of the past two years, let’s stand strong with the millions of small business owners that our economy relies on. Now is not the time to implement a surcharge on small business ownership.

Jake A. Leahy is a Consumer Choice Fellow with Young Voices. He is a J.D. Candidate at the University of Illinois Chicago School of Law, as well as an elected school board member and vice president.