Does Senator Cruz Want to Tax Small Business?
Most of Senator Cruz’s policy proposals are clear. This is in contrast to the evasions of other people currently running for president, most notably Donald Trump, whose health policy proposals in particular are incoherent, and may in fact most closely resemble Bernie Sanders’s.
On one rather crucial point, however, Cruz needs to clarify what he is saying. In the last Republican debate (February 13), Cruz said that his business tax proposal is “16 % imposed fairly and evenly across the board on all businesses.” Does he really mean all businesses? If he does, this would include small businesses, which have never before been directly taxed by the government.
This is even more confusing, because Cruz also said: “Small businesses are the heart of the economy. Two thirds of new jobs come out of small business.” If he believes this, then why would he want to tax small businesses that have never before been directly taxed by the federal government? Surely he recognizes that many of them are barely getting by and that taking 16 % of their revenue would bankrupt them.
It is also unclear what would be deductible for these businesses in computing taxes. Would all revenues be deductible including employee expense? Or would employee expense not be deductible, as in the case of a similar proposal thought to be crafted by Steve Moore, former president of the Club for Growth, who has advised more than one Republican candidate? If employee expenses are not deductible, then the tax would take not 16 %, but over 30% of revenues.
In order to understand all this, you must know that small businesses are almost always set up as a small proprietorship, partnership, limited liability company ( LLC), or S corp. These have never been taxed directly by the federal government. Any income ( revenue minus expense) flows into the owners’s personal tax return where it is taxed at personal tax rates.
The federal government has taxed corporations ( the technical term is “C” Corporation). These are generally larger businesses that want to sell their shares to the public and are only allowed to do so as corporations. In the case of these businesses, the government takes one tax, and then the income left after tax goes to the owners who are taxed a second time on their personal returns. Because of the double taxation, the federal government could in some instances take over 60% of the revenue.
Does Senator Cruz realize that he seems to be proposing a tax on small business that could destroy the job creation that he clearly wants? Does he really want to raise the small business tax rate from zero to at least 16 percent and perhaps much higher?
The solution is simple. He needs to make it clear that he is talking about taxing corporations, not all businesses. He just needs to change one word. And he had better get this clear before, not after he is ambushed on this point in a debate or by some reporter.
Hunter Lewis is co-founder and past CEO of Cambridge Associates, a global investment firm, and author of books on economics, including Where Keynes Went Wrong.