Last week, CNBC and “Shark Tank” celebrity Kevin O’Leary voiced his disapproval of a provision included in the House GOP’s tax proposal that would change the oversight of the Employee Retention Credit.
“I read all these bills through the eyes of small business,” O’Leary said. “[It] says the IRS will get extended powers to audit small businesses for up to nine years if it took [the credit]. Now, that is going to cause chaos in valuations if you have that hanging over your head.”
O’Leary then said: “Somebody should fix this in the big, beautiful bill, because it’s not beautiful for small business.”
He’s not wrong. Worse, he’s missing an even bigger, uglier issue.
Sure, these changes to the Employee Retention Credit will affect the small businesses that have utilized the credit, which provided additional support during COVID but has unfortunately been abused by some. However, the credit was utilized by a very small percentage of the country’s 33 million small businesses. The bill, which the House just passed, is potentially creating a more worrying problem that will impact all of these business: a looming inflation and interest rate bomb.
Among its many provisions, the bill includes not only extending the Qualified Business Income Tax deduction set to expire this year, making it available to more businesses, but increasing the amount of what can be deducted by eligible “pass through” businesses from 20 percent to 23 percent. It would also restore first-year deductibility of capital equipment and research and development costs, as well as maintain higher standard deductions for individual returns and higher exemption levels for estate taxes (critical for the many who are planning on an exit).
But, according to recent estimates, the bill does little to reduce our long-term deficits. In fact, the Congressional Budget Office forecasts that it will increase our already astronomical $36 trillion national debt by $3.8 trillion in the next 10 years.
“Over the next decade, the U.S. government’s interest payments on the national debt are now projected to total $13.8 trillion — the highest dollar amount for interest in any historical 10-year period and nearly double the total spent over the past two decades after adjusting for inflation,” reports the Peter G. Peterson Foundation, a bipartisan think tank. “In fact, by pretty much any measurement, interest on the national debt will soon grow beyond its highest level since 1940, when such data were first collected.”
The organization estimates that “federal interest payments would rise to 18.4 percent this year, equaling the previous high set in 1991.”
Already the bond markets are reacting negatively. And so should they be — these numbers are unsustainable. And while many small businesses remain oblivious to these effects, they’ll be experiencing its consequences firsthand in the not-too-distant future.
As anyone running a business knows, there’s only two ways to cut losses. You can grow revenues, or you can reduce expenses. But for governments, the answer isn’t as simple.
Growing revenues is difficult, particularly when the government is pushing massive tax cuts. The presumption is that these cuts will spur growth, which will in turn generate needed tax revenues. But this is very iffy — and many economists aren’t so confident this will happen. Reducing government expenditures? Ask Elon Musk how easy that is. And who’s going to touch the government’s non-discretionary mandatory spending, which is now as much as 61 percent of total spending? It’s political suicide.
The answer to the problem is inflating our way out of our debt by printing more money to pay the interest. But, as markets are showing, this comes at a cost: more money in circulation is inflationary. And with that comes more risk, which results in higher interest rates compounded on top of the Fed’s efforts to control its money supply with higher borrowing rates.
If you’re running a small business — or any business, for that matter — the impact is higher future costs to buy goods and services and higher interest rates to finance growth and investment. The days of zero percent inflation and interest are long gone. My prediction is that the level of interest (the average bank’s prime rate is currently 7.5 percent, but some of my clients pay points above that) and inflation (now at 3 percent) will continue to grow. And that doesn’t take into consideration the impact of tariffs and supply chain disruptions.
Maybe technology can save the day by increasing productivity and reducing our costs in such a way that these increases are manageable. It’s possible, given the potential of AI. But these benefits are still a few years away.
I do love lower taxes, of course. But nothing is free. And the benefit of lower taxes will likely be offset by the higher costs caused by rising inflation and interest.
Gene Marks is founder of The Marks Group, a small-business consulting firm.
