The GrayMan Writes About Taxes: Phased-in Business Tax

Before I forget: Happy Vernal Equinox, everyone!

And now, on to today’s tax topic:

States and municipalities often vie against one another to offer tax breaks to businesses moving into an area, but not so often to new businesses that are too small or too local.

Most new businesses fail within the first couple of years.

Those two situations together form a nice nexus of opportunity, in which new businesses that do not qualify for other tax incentives could be spared the full brunt of corporate taxation when they are most vulnerable.

We could choose whatever phase-in period was appropriate, but for the sake of argument let’s assume a four-year phase-in. In that case, a business’s corporate tax would be multiplied by x/4, where x is the number of years since the business started. The first year’s taxes would be 25% of normal, the next 50%, the third year’s 75%, and only in the fourth year and thereafter would the business have to pay their full tax. By reducing the tax burden on new businesses, it would give them more money to spend on stabilizing their businesses and making them successful.

Other adjustments could be added based on the size of the business, giving bigger breaks in the early years to businesses with more employees, or possibly based on the type of business. For example, a small manufacturer making a product important to national security might operate on a longer adjustment schedule.

How many businesses that would otherwise fail would succeed under this arrangement? We have no way of knowing. And perhaps it would be counter-productive, in that the businesses that would fail anyway might be better off failing sooner rather than later. But small- and medium-sized businesses are vital to the overall stability and health of our economy, so it seems prudent to give them the best possible chance to succeed.

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This proposal may be a nice adjunct to the Business Activity Tax Simplification Act favored by the National Taxpayers’ Union. That act makes it clear that cities, counties, and states may only levy business taxes on companies whose employees or property are actually within their jurisdiction. Read about the act here.

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