Why Entrepreneurs Are Rejoicing Over The New Tax Act (And One Big Reason For Concern)

"It is business that generates the jobs, income and taxes that keep a country going."
 ---Mark Skousen (American economist)
 
If you keep up with current events, I'm sure you're aware that the Republican-controlled Congress passed a sweeping tax reform bill last week.  We’re not going to address the full minutia of the 2017 Tax Cuts and Jobs Act in this article. However, here are a few of the salient highlights for American businesses:

• The new Tax Act lowers the corporate income tax rate permanently to 21%, starting in 2018
• The new Tax Act establishes a 20 percent deduction of qualified business income from certain pass-through businesses. Specific service industries, such as health, law, and professional services are excluded. However, joint filers with income below $315,000 and other filers with income below $157,500 can claim the deduction fully on income from service industries.
• The new Tax Act allows full and immediate expensing of short-lived capital investments for five years. It also Increases the section 179 expensing cap from $500,000 to $1 million.  

The substantial cut in U.S. corporate tax rates is undoubtedly the single greatest change in our federal tax laws in the last 30 years. It also seems to be the most controversial portion of the new legislation.  Indeed, left-wing politicians and left-leaning media outlets have been quick to condemn the new Tax Act as a gift to the wealthy at the expense of the middle-class.

Before and after the House and Senate votes were taken last week, the pollical hyperbole was in full effect.  According to Senate minority leader Chuck Schumer (D, NY), the tax bill seemed to “stuff even more money into the pockets of the wealthy and the biggest corporations while raising taxes on millions in the middle class.”  House Minority leader Nancy Pelosi (D, CA) went even further stating, “This GOP tax scam is simply theft, monumental, brazen theft from the American middle class and from every person who aspires to reach it. The GOP tax scam is not a vote for an investment in growth or jobs.”

It’s interesting to note that the final votes in both the House and Senate fell squarely along partisan lines.  While a handful of Republicans opposed the bill in the House, not one single Democrat representative voted in favor of the legislation. The same was true in the Senate where all but one Republican (Bob Corker (R, TN)) voted yea and the entire Democrat Senate voted nay.

The apocalyptic reactions to the bill's passing from Democrat leadership and the left-wing media are deeply disturbing, particularly when you take into account that most nonpartisan economic think tanks project sizable economic gains under the new tax plan.  For example, the Tax Foundation (a non-partisan Washington D.C.-based think tank) conservatively estimated in their preliminary analysis  that the new Tax Act will generate:

• An increase in the GDP of 1.7%
• An increase in capital stock of 4.8%
• Growth in wage rates of 1.5%
• Change in long-run full-time equivalent jobs 339,000

Keep in mind that the Tax Foundation used very conservative assumptions for their forecast model and did not take into account any real compounding effects. In contrast, several other noted economists are predicting far, far greater returns over the long run.  For example, Forbes contributor Bill Conerly recently remarked, “The biggest impact will be the gradual improvement in economic growth year after year. A small increment added to our recent growth rates would be inconsequential in any one year, but the increments will cumulate and even compound. Twenty years from now, the difference will be significant.” In other words, it's very feasible that the new Tax Act will create economic boon conditions and actually increase tax revenues over the long run.  

While the true long-term economic impact of the new tax legislation remains open for debate, a sizable number of high-profile American corporations are already beginning to return immediate dividends to their workers.  Several companies (including Boeing Comcast, Fifth Third Bankcorp and Wells Fargo) announced new investments, minimum wage hikes and employee bonuses the day after the tax reform bill was passed by Congress. More major companies are expected to quickly follow suit, thereby negating much of the original hyperbole surrounding the bill.

It’s doubtful that left-wing politicians and their media minions will abandon their talking points anytime soon.  They’ll have you believe that the only business enterprises that stand to benefit from a substantially lower corporate tax rate are companies listed on the Fortune 500 or the S&P Index. In truth however, startups and nascent stage companies bore substantial penalties and burdens under our nation's old federal tax structure.  Smaller businesses couldn’t take

advantage of many of the loopholes and special deductions that major corporations could. Additionally, the draconian 35% corporate tax structure discouraged venture capitalists from taking sizable risks on startups in the U.S. market for years.

Smaller businesses are the backbone of the American economy. In 2017, over 60% of American private sector jobs are with companies with less than 1000 workers.  For a good number of these companies, the new Tax Act dramatically changes their scalability dynamics. Although not every small to medium size business owner wants to grow the size of their enterprise, a good number in fact do.  It doesn’t take a rocket scientist to realize that the newly enacted tax legislation frees up financial capital for growth, research and expansion that was previously earmarked for the coffers of the federal government.  

In parallel, it’s very likely that Venture Capitalists will begin to invest more and more in startup opportunities in relatively dormant American industries.  Again, we're not going to get into Tax Act's minutia in this article (i.e. tax implications for VC investments). However, a basic understanding of economics leads to a realization that a sizable reduction in corporate tax rates makes American investments more attractive to VCs.  Therefore, the likely influx of investment capital will undoubtedly lead to greater innovation. These investments will also increase demand for skilled American labor in a number of industrial sectors as competition increases. Consequently, real sustainable wage growth for American workers appears within reach for the first time in nearly two decades.

Conclusions
Left-wing pundits would have you believe that the new Tax Act is simply "organized theft" orchestrated by a handful of wealthy elites for their own personal gain.  They say that taking funds away from the federal government ultimately harms the American worker and will be bad for the country over the long run.  We say, don’t believe this hyperbole. In fact, we argue that the 2017 Tax Reform and Jobs Act will greatly benefit most every American who still believes in the American Dream.

We'd be remiss if we didn't mention that an estimated 40-45% of all Americans pay no federal income taxes whatsoever today.  There are many factors behind this astounding figure. However, an economic stimulus package of this magnitude will most certainly reduce welfare and unemployment figures in the years to come. In addition, the average American worker who pays taxes is expected to realize a sizable tax reduction under the new plan.

More important to our nation's future, American industry will once again have competitive advantages in the global arena. The truth of the matter is that our nation benefits wholly when job creators have more capital available to create, execute and innovate.  Unleash the financial handcuffs from the John Galts of American enterprise and the free market will flourish.  The positive effects will certainly ripple though society much as Mr. Conerly stated in his recent Forbes column.
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In closing, a sad truth was revealed in the final Tax Cuts and Jobs Act debates and voting tallies last week. The leadership of the Democrat Party, as a whole, has now moved as far to the left on the political spectrum as the self-proclaimed “Democratic Socialist” Bernie Sanders (I, VT). They seem to have completely abandoned the virtuous, free market principles that have guided our Constitutional Republic for the last 241 years. Their "progressive" label appears to be a thinly veiled euphemism for neo-Marxist ideology. If John F. Kennedy were alive today, I imagine that he'd be aghast at what's become of his Democrat party.

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​Author: Erik Gagnon - Managing Partner, Chi Rho Consulting