In the race to create jobs – or at least to state the intention of doing so – most politicians are long on promises, and short on delivery. But nowhere is this more obvious than when it comes to the creation of small businesses. But since he is not a career politician, do we dare speculate that the Trump presidency is likely to benefit small businesses?
We can hope. In fact as a nation, we should all hope. Small business creation is the engine of job creation as well. That isn’t it just because new small businesses hire people to fill jobs, but also because once a person becomes self-employed, they are no longer competing for the available pool of open jobs. For this reason, the health of self-employment in the US is important to you even if you are a job holder. More small businesses means more job opportunities for you.
The recent history of small business creation is not encouraging. The pressure that’s on small businesses are nothing short of enormous. The self-employed have to deal with regulations and taxes that wage-earners simply don’t have to worry about. We should hope for a significant improvement with Donald Trump, but there have been false hopes in the past. For example, Ronald Reagan promised to cut taxes and regulation, and while the initial performance was impressive, the whole strategy was worn down even before he left office.
The Long, Well-trodden Path of Non-Help for the Self-Employed
The news on self-employment in the US is disturbing. According to information published by the Organization of Economic Cooperation and Development (OECD) here’s how self-employment in the US stacks up compared to select other developed countries (percentage of the workforce self-employed as of 2013):
- US, 6.6%
- Russia, 7.3%
- Canada, 8.8%
- Australia, 10.1%
- Sweden, 10.6%
- Germany, 11.2%
- Japan, 11.5%
- Israel, 12.6%
- UK, 14.5%
- Ireland, 17.1%
- Spain, 17.9%
- Italy, 25.1%
- Korea, 27.4%
- Brazil, 31.2%
- Mexico, 33.0%
The US is near the bottom of the range in the percentage of its workforce that’s self-employed. This is a difficult concept to swallow given that we normally think of ourselves as a “free country”, bastion of free enterprise, or whatever other optimistic label that you want to slap on the country. The very low rate of self-employment tells a very different story.
Notice that I’ve bolded Russia and Sweden on the list. That’s because Russia is our former communist enemy – some would say they still are – and yet they still have a slightly higher rate of self-employment than we here in the land of the free have. And Sweden is well known to the one of the ultimate socialist states in the world, and yet even they have a rate of self-employment is more than 50% higher than ours.
I realize that not many Americans think of the dearth of self-employment as being a legitimate problem. And superficially they may be right. But the weak state of self-employment is a crisis that causes other more obvious problems. One is certainly the weak job market, but there are others.
For example, we might be able to tie a low level of self-employment to the disintegration of both communities and the nuclear family unit. The corporate job market, that totally dominates today’s employment universe, often disrupts both communities and families. This happens in part because large companies drive out small businesses, but also because they cause families to disperse geographically, in the pursuit of both jobs and promotions.
A greater emphasis on self-employment could help to restore those two cherished institutions. After all, there was a time – not all that long ago – when we were a nation of farmers, craftspeople and shopkeepers. Many of those people either worked from home, or very close by.
So what does the Trump administration have that might help to improve the lot of the self-employed?
The Trump Tax Plan
The the Trump Tax Plan looks as if it will lower taxes on what may be the majority of Americans. This will include the self-employed.
The current tax scheme works with seven tax brackets; the Trump Tax Plan will reduce that to three. It looks like this:
Brackets & Rates for Married-Joint filers*:
- Less than $75,000: 12%
- More than $75,000 but less than $225,000: 25%
- More than $225,000: 33%
(*Brackets for single filers are ½ of these amounts.)
The Trump Plan will increase the standard deduction for joint filers to $30,000, from $12,600, and the standard deduction for single filers will be $15,000. The personal exemptions will be eliminated as will the head-of-household filing status.
2017 individual income tax rates for married filing jointly:
- $0 to $18,650 – 10%
- $18,651 to $75,900 – 15%
- $75,901 to $153,100 – 25%
- $153,101 to $233,350 – 28%
- $233,351 to $416,700 – 33%
- $416,701 to $470,700 – 35%
- $470,001 and higher – 39.6%
The standard deduction for a couple who are married filing jointly will be $12,700 for 2017, while the personal exemption is $4,050 per person.
Let’s work an example. We have a husband and wife, one of whom is self-employed and the sole income for the family. The business generates a net income of $100,000. The couple have two minor children, and file married filing joint, using the standard deduction of $12,700, plus $16,200 for four personal exemptions. That means that the first $28,900 that they earn is not subject to income tax, leaving a taxable income of $71,200.
Based on the 2017 tax brackets, they would pay a 10% tax on the first $18,650 of taxable income, equal to $1,865, plus 15% of the next $52,550, or $7,883. The total amount of federal income tax due by this couple is $9,748.
Now let’s see how this couple fairs under the Trump Tax Plan.
They have the same tax profile, but the first $30,000 will be tax free. That’s the standard deduction – there are no personal exemptions. $70,000 of income will be taxable. At 12%, the tax will be $8,400, which is $1,348 less than the tax bill would be under the current tax system.
The Trump Plan also proposes to lower the business tax rate from 35% down to 15%. If this applies to all businesses, including sole proprietors and partnerships, it will serve to prevent the self-employed from being pushed into higher tax brackets.
But like a lot of the campaign promises that Trump made, the tax plan is vague in a lot of areas. For example, it says the following:
(In regard to the 15% tax rate)…”This rate is available to all businesses, both small and large, that want to retain the profits within the business.”
So what does this mean for profits that are taken out for the business owner and his/her family to live on? The plan is not clear.
Another area of confusion:
“It (the tax plan) eliminates most corporate tax expenditures except for the Research and Development credit.”
Does “expenditures” refer to business expenses? If so, the lower tax rates will be overwhelmed by the inability to deduct business expenses, which will expose more income to taxation.
Since the plan is so vague, and since it must go through the legislative process, there’s no way to tell if it’s a business-friendly proposal.
The Unkindest Cut – What the Trump Tax Plan Doesn’t Solve
If you’re self-employed, it’s the “self-employment tax”. For everyone else, it’s the FICA tax, a.k.a., the Social Security and Medicare tax. This is the most regressive tax charged on the self-employed.
As an employee you pay 7.65% of your pay into the FICA tax. Your employer matches 7.65%, for a total tax of 15.3%. If you’re self-employed you pay both halves of the tax, or 15.3% straight up. That’s in addition to federal income tax and state income tax!
If you’re self-employed and you pay 15% in federal income tax, 5% in state income tax, and 15.3% in FICA, your tax bracket is 35.3%. That’s even if you make less than $100,000.
Isn’t that what the “rich” are supposed to pay? Don’t count on it. Much of the income of the rich comes from investment income, which is not subject to the FICA tax. And much of the investment income comes from capital gains income, which has a top tax rate of 20%. If you’re rich, and you pay 5% on state income tax, and much of your income is from capital gains, your combined tax rate is just 25%.
Compare that with 35.3% paid by a lower income self-employed couple; something isn’t right.
Unfortunately, there’s been no smoke from the Trump camp in regard to the FICA tax on the self-employed. Even with the slight improvement in federal taxes under the Trump plan, the self-employed will continue to pay higher taxes than most other Americans, including the wealthy.
Other Trump Proposals that May be Related to Self-employment
Repeal of Obamacare. Trump has vowed to repeal Obamacare, and he has the Republican Congress to make that happen. While this isn’t directly aimed at the self-employed, it has been a problem for small businesses. Obamacare has resulted in very high premiums, in combination with very high deductibles. Then there’s also the issue of penalties for lack of coverage. None of these attributes are small business friendly, and their elimination can only help.
Immigration. This is a double-edged sword. On the one hand, restricting immigration could result in less competition, since many immigrants are themselves self-employed. But on the other hand, a potential reduction in the number of immigrants could force small businesses to pay higher wages. We’ll have to see how this one plays out, and if it even happens.
Reduced regulation. Has there ever been someone who is come to high office, promised to reduce regulation, and actually done it? This is another mixed bag. The problem is there are regulations dealing with every area of life, and with every phase of business. Unless an onerous regulation or two that are related to your business are removed, it’s unlikely that we’ll see a whole lot of positive action on this front.
Foreign trade. Trump has promised to tear up and renegotiate various international trade agreements. That’s probably not a bad thing, since they have mostly proven to be negative since inception. However, it once again depends on your business. Virtually everything that can be made is made outside the US, and many small business merchants make their living selling foreign products. A sudden limitation on that flow could prove to be disruptive. Flipside – a resurgence of American manufacturing and farming creates numerous opportunities for small businesses.
Putting it All Together
There’s a lot of hype surrounding Donald Trump. We should dare to hope. But at the same time, it’s been painfully evident over the decades that the American government bureaucracy is a very large and very well insulated ship. Many even minor changes seem to be beyond our reach in recent years. The major changes seems to be more of a pipe dream.
Let’s hope that Mr. Trump accomplishes most of his agenda within the first 100 days, or at least within the first six months. After that, we have strong reason to suspect that his various strategies will either be watered down or completely discredited.
Hopefully that won’t be the case. No matter how much the public has been brainwashed to believe otherwise (ie, that self-employed people are rich parasites who don’t “pay their fair share”) America really needs a resurgence in self-employment. It’ll be a major positive direction for the whole country, and not just small business people.