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Statement of the Hon. Nydia Velazquez on How Tax Hikes Crush the Competitiveness of Small Businesses

Main Street businesses form the bedrock of our nation’s economy, driving innovation and job creation, even during periods of economic turmoil and uncertainty. Regrettably, despite the fundamental importance of small firms, recent tax reform has catered to the interests of wealthy individuals and large corporations instead of American entrepreneurs.

Small businesses require certainty and simplicity to compete. However, our convoluted and onerous tax code creates an overwhelming burden for these businesses. Small firms typically don’t have tax professionals on staff, and must spend substantial funds on outsourcing their tax preparation.

Unfortunately, the 2017 tax law did little to simplify the tax code. Instead, it contributed to greater complexity and diminishing returns for small businesses. Even tax provisions aimed at helping small firms, such as the pass-through deduction, ended up disproportionately benefiting the wealthy.

While only 8 percent of those who took advantage of the 199A pass-through deduction last year had income over $500,000, that 8 percent accumulated two-thirds of the $36.5 billion tax benefit. This is particularly striking given the average income of a small business owner is roughly $70,000 per year. The 2017 tax law saddled entrepreneurs with more complexity and uncertainty by making the small business provisions in the bill temporary– while making corporate tax cuts permanent.

Over the past several years, evidence has emerged confirming the warnings that the wealthy benefit disproportionately from this law. Corporate profits have surged to record heights – as has corporate tax avoidance, often at the expense of higher prices for American households.

This abuse has led to a growing concentration of economic power, fostering corporate monopolies that use their extensive market share to crush the competitiveness of small firms.
From offshore tax shelters to local economic development incentives, large corporations leverage these loopholes to undermine small businesses.

That’s why I was encouraged to see that IRS and Treasury have pledged not to use additional enforcement funds, passed as part of the Inflation Reduction Act, to increase audit rates of people that make under $400,000 per year. Instead, they will focus their efforts on high income non-compliance, leveling the playing field for our nation’s small employers.

Additionally, I applaud their commitment to using these funds to help modernize their systems, and to help small businesses meet their obligations and access eligible tax incentives. This is a crucial step in creating a fair and level competitive landscape for small firms.

Lastly, we should not ignore the budgetary consequences of the 2017 law, which has significantly contributed to soaring fiscal deficits. And we now find ourselves only weeks away from a potential default on the national debt, which threatens to plunge small businesses into uncertainty and potentially trigger a devastating economic recession.

If Congress truly wants to help small firms, we must start working with them to simplify the tax code to bring real reforms that make a meaningful impact to their ability to comply and operate. It is my hope that today’s hearing will allow us to start a dialogue to start the process of building a better tax framework for our country’s small firms.
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