Peter Schorsch
Republican U.S. Rep. Vern Buchanan said last week he planned to keep pushing for a bill that would even out the tax rates between taxes for small businesses and corporations in the next Congress.
Many small businesses are formed as S-Corporations, which operate as pass-throughs for shareholders. Shareholders of these businesses pay no business taxes, and instead have their earnings taxed at their often-higher individual tax rate.
“Let’s stop placing these small- and medium-sized businesses at a competitive disadvantage against large corporations. I’m optimistic that my legislation to level the playing field will play a significant role in upcoming tax reform efforts,” Buchanan said.
“If we want to energize the economy and create more jobs, we need to ensure that small businesses don’t pay a higher tax rate,” he added.
Buchanan said he would push for a single-rate business tax regardless of who was elected president, though his goal will likely be easier to achieve with incoming President-elect Donald Trump, who advocated a similar policy on the campaign trail.
Trump’s plan calls for a 15 percent rate both for business income for corporations and for pass-through businesses.
Unlike Trump’s plan, Buchanan’s proposal would prohibit business income of individuals from being taxed at a higher rate than corporate income, though he hasn’t laid out any specific rates.
Currently, S-Corporation owners pay up to 39.6 percent tax on their earnings, the top income tax bracket for individuals, compared to corporations, which pay 35 percent tax.
Buchanan said simply lowering the corporate tax rate “does nothing” for the many American businesses formed as pass-through corporations.
Among the 11 co-sponsors of Buchanan’s plan are Texas Republican Rep. Bill Flores, chairman of the Republican Study Committee, and North Carolina Republican Rep. Mark Meadows, a leader of the Freedom Caucus.
One comment
Jan Schneider
November 16, 2016 at 4:35 pm
The Main Street Fairness Act (H.R. 5076) sponsored by Vern Buchanan would limit tax rates for pass-through business income to corporate rates. Instead of another tax boon primarily benefitting the wealthy, it would seem fairer to close the pass-through loophole for big businesses.
S corporations, LLCs, and partnerships are labeled “pass-through” businesses because profits are attributed directly to their owners and taxed at owners’ personal levels. Such entities nevertheless enjoy many classic corporate benefits, including limited liability. This contrasts with treatment of traditional C corporations, which are subject to corporate income taxes and their owners to taxes on dividends. The maximum marginal tax rate for corporations is 35 percent, while that for individuals is 39.6 percent (beginning at $415,050).
Buchanan touts his bill as benefiting small businesses, but it would only result in savings individuals with very high income levels. While small businesses may predominate numerically, however, pass-through income is highly concentrated among the wealthiest Americans. A 2015 study for the National Bureau of Economic Research found that “[o]verall, 69% of pass-through income earned by individuals accrues to the top 1%.” Moreover, “[t]he average federal income tax rate on U.S. pass-through business income is 19% — much lower than the average rate on traditional corporations.”
The same study calculated federal revenue losses from the surge since 1980 of pass-through arrangements at $100 billion in 2011 alone. The long-term budget impact appears enormous in terms of lost opportunities for cutting taxes for middle class or true “Main Street” Americans, reducing the national debt, sustaining federal programs and other objectives.
Accordingly, the Buchanan proposal – and a similar proposal abandoned by then-candidate Donald Trump — would constitute more expensive tax cuts for the rich. Conventional wisdom suggests that to understand what a congressional bill does, read its title — and assume the opposite.
Comments are closed.