- Tim Wulf, a Jimmy John’s franchisee, says the Republican tax plan doesn’t help small-business owners.
- Wulf, a former economics professor, says the tax bill lacks measures to boost labour productivity, which he identifies as the most important driver of US economic improvement.
- To that end, Wulf is most concerned with the expensing of equipment, interest on debt, and the tax cut being offered to S-corps and partnerships.
- Wulf is a Republican but says he keeps his politics out of his economic analysis, which includes regular written contributions to trade publications and local outlets.
Tim Wulf, a Jimmy John’s franchisee in Reno, Nevada, was hoping that Republican tax bill would help him pay his employees more. After all, one of the long-running stated missions of tax reform has been to boost wages and improve the standard of living for US workers.
Instead, it looks as if the legislation – which officially passed through Congress on Wednesday – could end up making things even tougher for people like Wulf, an economics professor turned entrepreneur.
A franchisee of multiple Jimmy John’s sandwich shops, Wulf is part of a rapidly growing network of restaurants that prioritise super-fast delivery. For a Jimmy John’s store to receive an order, prepare it using fresh ingredients, and then schlep it to your front door in a tight window of time, it needs both skilled employees and top-of-the-line equipment.
Under the new plan, Wulf doesn’t expect to be able to meaningfully upgrade either of these areas – at least not in the long-term fashion befitting a growing business. And as someone who also serves as the Nevada chapter chair for the National Federation of Independent Business Leadership Council, it troubles him to see how tax reform has played out – not just for his operation but for small businesses as a whole.
There are three areas of the tax bill that have him particularly concerned, with the first two directly affecting the higher wages and machinery upgrades he’s so keen to deliver. They are:
1) Expensing of equipment
On first blush, the portion of the tax bill that will allow businesses to immediately deduct the cost of new equipment for a five-year period is a big improvement on the previous setup, which made them take depreciation and then apply the tax benefit over multiple years.
While Wulf acknowledges the boost this would offer, he wants to see it instated on a permanent basis. That way, owners could invest in their businesses with a clear growth plan in mind – with none of the restrictions that might accompany a finite time horizon.
So how does this relate to wages?
Remember, Wulf is an economics professor – so he explains it that way: It all boils down to making labour more effective, which then translates to better pay. In his mind, investing in technology and machinery are the elements most crucial in boosting overall labour productivity.
By making labour more valuable, we can pay employees more.
“By making labour more valuable, we can pay employees more – and we want to pay them more, we want to keep them,” he said in a recent phone interview. “And in order to be able to do that, they have to be more productive. And for that to happen, they have to have the tools of productivity.”
2) Interest on debt
While the equipment-expensing part of the tax bill at least offers an immediate-term positive, there’s no such silver lining when it comes to the GOP’s plans for interest on debt.
Previously, interest counted as a business expense. But under the new tax bill, the net interest deduction is capped at 30% of Ebitda for four years, followed by an even tougher threshold going forward. Wulf sees this hampering growth for small businesses by making it more difficult to borrow money.
“You could grow your business on retained earnings,” he said. “But that’s no way to do it.”
This issue also ties back to the equipment conundrum outlined above. Without the ability to borrow as easily, small businesses will have a tougher time purchasing the machinery that could enhance labour productivity. In the end, this provision leaves companies more hamstrung financially and doesn’t help boost pay.
I thought that small business had dodged a bullet on deducting interest, but now the government is telling me how much leverage I can assume.
“I thought that small business had dodged a bullet on deducting interest, but now the government is telling me how much leverage I can assume,” Wulf said. “I would have slowed the growth of my restaurants when I was building them, as I know early on our interest exceeded 30% of Ebitda.”
3) Corporate tax cut
Simply put, so-called pass-through businesses like S-corporations and partnerships don’t look poised to realise as much of a benefit from tax reform as their C-corporation counterparts – though it’s tough to make a direct comparison between the two.
The new tax bill includes a 20% income deduction for pass-through entities, which on the surface seems like less than the 21% C-corp tax rate put forth in the plan. But when you combine that 20% deduction with the lower top tax rate on ordinary income, it actually comes out to a 29.6% top rate on that income, according to a Wall Street Journal analysis.
While Wulf realises that there are many moving pieces when it comes to comparing the tax structures of C-corps and pass-throughs, he ultimately just wants small businesses to be on equal footing with large US corporations.
At the end of the day, a favourable and competitive tax rate provides more money to sink into capital expenditures. And that reinvestment then improves labour productivity, which then allows a business to rationalize paying higher wages.
It’s all connected, and all aimed toward the goal of expanding the economy – of which 70% is small businesses. In Wulf’s mind, the GOP bill doesn’t go nearly far enough toward realising its professed objective of boosting US growth.
An eye on the future
It’s worth noting that Wulf’s outspoken advocacy for small businesses comes with little self-interest attached. He’s selling his Jimmy John’s stores, with an eye on retirement, and has just one store left to offload. In January, he’ll close on his final location, the 12th-best-performing Jimmy John’s in the US.
And his personal politics don’t play a role either. Wulf is a Republican, but he says he looks at political policies from a strictly economic viewpoint. That much can be seen through multiple pieces he’s written for various trade publications and local outlets in recent years.
At the end of the day, he wants to see small businesses thrive, and he doesn’t see the shiny new GOP tax bill allowing that. Which is ironic to him, considering their original stated objective.
“That’s the anchor here,” Wulf said. “There’s a problem with what they’re saying is going to happen and what the policy will actually create.”