Trump’s Tax Plan: Will it help Business Growth?

Posted on: November 3rd, 2017

Tax ReformEveryone knows that tax rates are too high in this country for small and middle market sized businesses. These are businesses that don’t shelter income in other countries, or have an army of tax accountants at their disposal working to ensure no tax is due.

Many middle market and small businesses are flow through S-Corp or LLC entities, and result in business owners getting taxed at the top individual rates which is 39%.

Large companies such as Apple, Google and Microsoft have resorted to legal offshore tax avoidance mechanisms, thereby significantly driving down their effective tax rates. In 2016, Microsoft had an effective tax rate of 16.5%. Alphabet, the Parent of Google, had a 19% effective tax rate.

The big company tax dodging has gotten so bad that countries are now presenting enormous tax bills to these mega companies. Apple got a $13 billion yes billion tax bill from the European Union.

Like one of my esteemed tax professors at Columbia said, the tax code is like a leaky bucket, and it has only gotten worse over the years. Over the last 40 years, the only serious tax code changes happened under Reagan.

When he cut taxes in the early 80’s we had strong economic growth. The problem with high taxes is that it ultimately creates a disincentive for high performers to work harder and to create more economic output.

When the marginal dollar of profit is taxed at 39% plus whatever percentage your State tax rate is, business owners see that as not a good deal. Why produce more income if about 50% of that extra profit dollar is going to be paid in taxes.

So tax reform is a long overdue in the US. More importantly, the fact that we have an administration mindful of the fact that taxes are not proportionately borne within the business community is a good thing.

Tax debates are always squishy discussions but the reality is that, when taxes are one of your costs of doing business, when costs go down, volume and business activity should pick up.

With lower costs, more things are possible and greater investment should follow. The very fact that the Trump Administration sees the need to address the tax code is good for business confidence and investment.