Who will benefit most from proposed tax reform legislation currently before Congress? The answer seems to depend largely on what side of the political spectrum the person answering the question sits on.
Democrats point to the legislation’s lowering of the corporate tax to 20 percent to claim the rich benefit most. Republicans highlight the legislation’s doubling of the standard deduction, lowered tax brackets on working-class income, long-overdue small business tax relief and significant expansion of the child tax credit to argue ordinary Americans are the biggest beneficiaries.
{mosads}While this debate likely won’t be resolved, there should be bipartisan agreement that proposed tax reform will significantly benefit the millennial generation, which has been largely passed over by the economic recovery.
A new national survey of millennials conducted by the millennial advocacy group GenFKD finds that three-quarters of respondents say the current tax code is unfair to young Americans, with even more saying that tax reform is needed.
Looking at millennial economic data, it’s easy to understand their disillusionment with the status quo. Millennial labor force participation has not recovered from the Great Recession and is significantly below their Generation X predecessors.
According to the Kauffman Foundation, the gap between millennial entrepreneurship and older generations continues to grow. Millennials may be the first generation in American history to be worse off than their parents.
That’s not to say that millennials aren’t interested in entrepreneurship. According to the GenFKD survey, two-thirds of millennials have thought of starting their own business, but three-quarters of respondents said the current tax code is unfriendly to small business growth.
Proposed tax reform will help millennials make their entrepreneurial dreams a reality by significantly reducing and simplifying the small business tax burden. The House tax plan will reduce the small business tax rate to just 9 percent on the first $75,000 of taxable income, a 40-percent cut from the current 15-percent rate.
To ensure that this provision helps small business startups most in need, it will only be available for businesses earning a maximum of $150,000 annually. This will directly benefit millennial entrepreneurs trying to get their “Shark Tank” products off the ground. For successful small businesses, the House bill will reduce the top marginal small business tax rate to 25 percent.
Instead of a separate rate structure, the Senate tax bill would create a 17.4-percent small business tax deduction, allowing millennial small businesses to keep some of their earnings tax-free to catch up to their competitors run by older generations.
Millennials will also particularly benefit from the tax legislation’s simplification, including fewer brackets and loopholes, as well as the ability for small businesses to immediately deduct business expenses.
Millennial entrepreneurs are currently at a competitive disadvantage with older companies because their steep tax compliance learning curve favors older established companies. According to a recent survey by NerdWallet, four-in-five millennials are fearful about some aspect of preparing taxes — well above the rate for the general population.
Finally, tax legislation will benefit millennials because it directly addresses their stagnant wages. Both the Senate and House bills call to double the income threshold under which individuals pay zero tax to $12,600. They both call to eliminate the 15-percent tax bracket in favor of an expanded 12-percent bracket.
These two reforms alone will save nearly all ordinary American workers thousands of dollars a year. This will particularly benefit millennials, who are still beginning their careers and are burdened with five-figure student loans and inflated housing costs.
Speaking of student loans, this is one aspect of tax reform that has the potential to hurt millennials. The House bill would eliminate the $2,500 student loan interest deduction that helps make millennials’ student loan burden a little lighter.
But the Senate bill leaves the deduction untouched. Given that student debt is cited by millennials as one of their barriers to entrepreneurship, lawmakers should adopt the Senate’s student loan treatment in the final bill.
But overall, millennials are big winners from proposed tax reform. Legislators should put aside partisan politics to recognize the much-needed relief it offers this generation and pass it.
Justin Dent is the executive director of Generation Financial Knowledge Development (GenFKD), an education and advocacy organization working to expand economic opportunity for young Americans. Follow him on Twitter @ImWithJD. His work has also been featured in Forbes and The Wall Street Journal.