Tax reform won't help most businesses
Non-corporate businesses may end up subsidizing tax breaks for corporations.
To the Obama Administration, tax reform means corporate tax restructuring. Both the president and Treasury Secretary Tim Geithner have argued that at least the first tranche of reform would scale back tax preferences, cut corporate rates, and, in all, raise the same money that the tax code does today. In Obama’s vision, redesign of the individual tax system would wait for another day.Skip to next paragraph
Howard Gleckman is a resident fellow at The Urban-Brookings Tax Policy Center, the author of Caring for Our Parents, and former senior correspondent in the Washington bureau of Business Week. (http://taxvox.taxpolicycenter.org)
Subscribe Today to the Monitor
But there is a problem with this scheme: It appears that while all businesses would lose some tax preferences, the rate cuts would apply only to corporations. Thus, non-corporate businesses would end up paying higher taxes. In effect, firms such as partnerships, sole proprietorships, and LLCs—about 90 percent of U.S. businesses—would subsidize the rate cuts for a handful of corporations. The House Ways & Means Subcommittee on Select Revenue Measures held an interesting hearing on all this yesterday featuring, among others, Tax Policy Center director Donald Marron.
As a matter of policy, treating corporate and non-corporate businesses more equally is an excellent idea. But Obama’s approach leaves much to be desired. And as politics, this arrangement will be exceedingly dicey. The inevitable headline will be “Small Businesses Pay for Multinationals’ Tax Cut.” This headline will be wrong, but effective.
Here’s the deal: Today, corporations are doubled-taxed. They pay corporate income tax on their profits. Many of their shareholders pay tax again when those earnings are distributed as dividends or when they sell stock and receive capital gains (some, such as non-profits and foreign investors, don’t pay the extra tax). By contrast, non-corporate businesses (often called- pass-through firms) pay no income tax at all at the firm level. Instead, their profits or losses are included on the individual tax returns of their owners.
Keep in mind that while these firms report their income on individual returns, they are hardly all small businesses. Former Treasury official Bob Carroll estimates that one-quarter of firms with taxable profits of $1 million or more are organized as pass-throughs.