If This Is Tax Reform, Count Me (And Small Business) Out

June 21, 2011
Dean Zerbe

In recent weeks, both the House and the Senate have held hearings on the chimera of tax reform.  I continue to believe that until the President (or conversely a Republican candidate/nominee) puts forward a detailed proposal for tax reform the issue is going nowhere.  Secretary Geithner’s comments notwithstanding — corporate tax reform happening by this fall (much less this Congress) is a journey to Fantasyland.   Maybe tax reform enjoying the tea cup ride to nowhere is just as well, however, if the latest two proposals — and their enormously damaging impact on small and medium businesses is indication – is what is meant by reform.

The first idea, courtesy of the Senate hearings,  was that all pass-thru entities with revenue of $50 million dollars or more a year (representing approximately 60 percent of all pass-through  income according to Finance Committee witnesses) would be subject now to double taxation — a corporate income tax as well as of course keeping in place the current taxation of earnings passed on to individuals.   As a reminder to readers, the vast majority of small and medium businesses in this country are organized as pass-thru entities (as an  S Corp, LLC, LLP, etc.).

 It is always a delight when policymakers take a tax policy that has little to speak for it in the present day – in this case ,requiring the earnings of investors/shareholders of C Corporations to be subject to double taxation – and try to expand that policy to medium-sized businesses struggling in this economy.  

But happily all is well because the billions of dollars in increased tax revenues that would now be brought in by expanding double taxation to pass-thru entities will be used to . . . wait for it . . . that’s right, to lower the corporate tax rate for the Fortune 500.

Brilliant.  In a down economy, let’s levy a whole new layer of tax (and accounting bills) on successful small and medium businesses — the engines of job creation.

Second verse same as the first.  The House, not to be out done, heard a variant of the same idea.   At a Ways and Means Committee hearing on tax reform were representatives of the Fortune 500 – many of whom enjoy a very low effective corporate tax rate.  Speaking their assigned lines, the Fortune 500 reps said they would support reduction of unspecified credits and incentives in exchange for a meaningful lower corporate rate.  How are some policymakers and the Fortune 500 proposing to lower the corporate tax rate?  Get rid of all the deductions, credits and incentives included in the tax code.   Use the billions of dollars raised from that effort to lower the C Corporate rate.

As a reminder, small and medium businesses that are pass-through entities also take advantage of all these deductions, credits and incentives.  So, we will be eliminating deductions, credits and incentives that benefit small and medium businesses and using the revenues raised to  lower the top corporate rate for the Fortune 500.  Please tell me that the House and Senate haven’t found one area of agreement in tax reform –namely, that taxes should be raised on small and medium businesses to provide lower tax rates for the Fortune 500.

Perhaps reason will prevail.  Ways and Means Committee Republican leaders have said that tax reform must not be just about corporate tax reform.   That reform must also look at the individual rates (which are the rates paid by the owners of pass-thrus).  Similarly, Senate Republican Leader Mitch McConnell has stated that any corporate tax reform must also address the individual rates (i.e. deal with pass-thrus).

The reality is that corporate tax reform is going nowhere.  Congress should stop wasting time waiting in line to get on the Dumbo ride–listening to eye-glazing academics and pandering corporations drone on.  Instead, it should focus on what  actually matters to Americans, namely creating jobs and economic growth today.  I welcome readers’ ideas on what can be done in the tax code to encourage jobs and economic growth– the subject of my next column.

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