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Democratic Tax Plan Will Squeeze Small Business

By Rea S. Hederman, Jr. for RealClearPolicy

Democrats in Washington are looking to bolster their tax-and-spend reputation as they try to pass an “infrastructure” package currently slated to cost taxpayers roughly $3.5 trillion in spending and untold sums in tax increases to “pay” for it.

To offset the spending-a-thon, corporate tax increases and higher income taxes were proposed. While some tax proposals made news, they have not been given the attention that they merit.

Democratic Drive to Increase the federal corporate income taxes from 21 percent to 26.5 percent, for example, has been widely reported, while the tax hikes proposed for small businesses, such as S-corporations and partnerships, have not.

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Reports have focused more on Wall Street than Main Street even though small businesses and partnerships comprise the majority of America’s businesses and Main Street will shoulder a heavier new tax burden than their Wall Street competitors under the new Democratic tax plan.

However, neither tax increase will benefit U.S. consumers or businesses.

American C-corporations pay currently a flat 21% federal tax on profits. Congressional Democrats want them to pay 26 percent — The highest rate of corporate income in the world. American small businesses, S-corporations, and partnerships, however, pay taxes according to the progressive income tax scale — with a top individual tax rate that would increase to over 40 percent under the congressional Democrats’ tax plan.

As U.S. businesses — big and small — continue to recover from the pandemic’s stifling economic effects, this is no time to hit them with higher taxes. Many international economists suggest lowering corporate and capital taxes as they cause the greatest damage. Many states, along with most of the industrialized world, have taken steps to lower corporate taxes, because lower taxes promote business growth, higher salaries, better hiring and innovation.

But Democrats in Washington think they know better and want to make some of America’s small businesses and partnerships the most heavily taxed businesses on the planet. This hubris is a threat to the national economy and its ability to create jobs.

Ohio and other Midwestern states, like Ohio, are strategically located. Their tax burdens were reducedSmall businesses can grow to compete with bigger corporations.

A few state policymakers realize that fledgling businesses not only provide new opportunities and create employment, but also require working capital. Even from larger companies, stealing more small business money to Washington will only make these efforts more difficult.

Perhaps the Democrats in Congress need to be reminded how corporations taxes work in real life. The federal corporate tax increase will be either passed on to consumers via higher wholesale or retail prices or leave companies with less money to invest in workers and grow their businesses.

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Either way, American prosperity will suffer under the Democrats’ tax-and-spend proposal.

This will help them to be more competitive. As other countries reduce their corporate tax burdens, their companies can lower prices to attract new customers and pay higher wages to attract new workers — all at the expense of American companies trying to compete in a global market.

Some states made great efforts in recent years to increase their economy and recover from Great Recession.

Congress and the Biden Administration seem poised to negate those laudable efforts with one of the largest corporate tax hikes in American history — and many small businesses and their employees may be completely unaware that it’s coming, and that they and their customers will pay the price.

RealClearWire granted permission to syndicate.

Rea S.Hederman, Jr. is the executive director for The Economic Research Center. She also serves as vice president of Policy at The Buckeye Institute.

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