Kitchen Table Economics

Small Business Tax Deduction Helps Fuel Economy

President Biden is eyeing his first major tax policy change of his administration. As suggested by Bloomberg, one of the plan’s components could be the elimination of the 20 percent small business tax deduction that was created by the 2017 Tax Cuts and Jobs Act. But what exactly is a tax deduction and how will the move affect small businesses and the economy they drive?

Under current law, some pass-through small businesses—enterprises in which company earnings are taxed at the individual rate of the owner—are able to write-off 20 percent of qualified business income. In short, small business owners can shield one-fifth of their revenue from federal income taxes–effectively creating a tax cut.

The financial savings realized from the provision allow small businesses to reinvest that extra cash back into the company. During the years following the passage of the 2017 tax law, entrepreneurs used the money to hire more workers, upgrade facilities and provide employees with a compensation bump. Prior to the pandemic, the tax cut was used to build one of the strongest economies in decades.

Yanking the small business deduction from the tax code, as the Biden administration is floating, will weaken an economy that is already struggling to recover. When adjusting fiscal policy, small businesses should receive a bigger tax break, not a smaller one.