As the Republican tax plan continues to advance — and morph — with dizzying speed, those of us in the accounting business continue to be astonished by the thickening maze of loopholes emerging from the bill.
As a CPA, I could be celebrating these loopholes. After all, I would be able to save my clients a lot on taxes and could be invited to fly along to, say, the Cayman Islands to set up an offshore account under the new regulations. Four days at the beach with a fully-stocked hotel minibar and all the HBO and Showtime programs I can watch — all fully deductible for me and my client. Sounds nice, right?
Wrong. As someone who has served small businesses for more than 30 years, and co-chair of an organization called Businesses for Responsible Tax Reform, I am not cheering. Small business owners aren’t cheering the bill either.
Quite the opposite. This bill, despite the glossy, small business-friendly language being used to sell it, would actually do more to widen the tax advantage gap between large businesses and small ones than our present — and already tilted tax code — does. This bill does just that, thanks to the change from a worldwide tax system, which requires US companies to pay Uncle Sam taxes on all their profits, regardless of where the income is earned, to something called a territorial one, under which companies don’t owe taxes to their own governments on income they make offshore.
This change, if enacted, would encourage wealthy businesses to learn how to go offshore to gain a more favorable tax rate than is available within our borders — giving them a significant financial and competitive advantage over our neighborhood mom and pops trying to stay afloat onshore.
Main Street small businesses aren’t among the lucky beneficiaries of a territorial tax system. Right now, companies must pay taxes if they repatriate earnings made outside the United States. But by shifting the tax code from a worldwide system to a territorial one, they would no longer have to pay any tax on repatriated foreign earnings; the US tax is simply eliminated on foreign income.
Businesses would be allowed to shift profits offshore to avoid American tax rates. Essentially that means we would be creating a tremendous incentive to reassign or push profits offshore; businesses with the financial wherewithal and accounting savvy to take advantage of it could create perfectly legal tax shelters.
While this kind of tax sheltering, to date, has been the gambit of large corporations, I’m already seeing a lot of business owners, including wealthy pass-through businesses, asking about setting up businesses offshore to take advantage of a lower tax rate. Who am I not seeing ask about this? My neighborhood day care provider, brew pub owner and dry cleaner — the small businesses that bring vitality to our communities and ground all our lives.
As professionals who parse the concrete numbers, not the airy promises of our leaders in Congress, accountants like me are in a position to know the truth about this bill. You can’t fool the accountants.
At the same time, no one should be trying to fool America’s small businesses, either. The GOP tax plan does little to help America’s small businesses. Instead it is an enormous transfer of wealth to large companies and wealthy families paid for by the middle class and America’s hardworking small business owners.
Congress must stand up and do what’s right for small businesses, the backbone of our economy. This means lawmakers need to end this charade, go back to the drawing board, and thoughtfully and deliberately develop a plan based on sound economic policies that actually help real small businesses.
