The National Federation of Independent Business and the S Corporation Association released a new study Wednesday showing that S corporations pay the highest effective rates of any business type.
The study, authored by Quantria Strategies LLC, compares the tax burden that different business entities will shoulder in 2013 and finds that S corporations will pay the highest average effective tax rate (at 31.6 percent of their income), followed by partnerships (29.4 percent), C corporations (17.8 percent) and sole proprietorships (15.1 percent).
The results of this study come at a critical time for tax reform. House Ways and Means Committee chairman Dave Camp, R-Mich., and Senate Finance Committee chairman Max Baucus, D-Mont., are focusing on crafting a comprehensive tax reform plan that they hope to unveil this year. With the release of the study, the lobbying groups hope to provide lawmakers in Congress with their perspective on how much they believe is paid in taxes by various types of business entities.
They also positioned the study in reaction to a speech last week by President Obama highlighting his proposals for business tax reform, which mainly focused on eliminating corporate tax loopholes and increasing investment in jobs to rebuild infrastructure and encourage more manufacturing (see Obama Urges Business Tax Rewrite to Help Finance Jobs Program). However, Obama also included some proposals for small businesses, including simplifying tax filing for small businesses and allowing them to expense up to $1 million in investments.
“While many people think of the statutory tax rate when they consider the effect of federal income taxes, the reality is that the statutory tax rate does not represent the best measure of the effect of taxes on a business,” said the study. “Average effective tax rates are a better measure of whether a particular industry or business form faces greater or lesser federal income taxes relative to other industries or business forms.”
A previous study by Quantria in 2009 examined businesses with under $10 million in receipts and led to similar results. According to the latest study, S corporations making more than $200,000 will pay 35 percent, equal to the marginal tax rate paid by the most successful C corporations.
Moreover, the study indicates that the S corporation tax burden is highly progressive, with the smallest S corporations paying 19 percent in tax, while the largest pay 35 percent.
“The study released today by NFIB and the S Corporation Association makes clear that comprehensive tax reform is the only way to ensure we make the tax code more fair and equitable for all employers,” said Rep. Dave Reichert, R-Wash., a member of the tax-writing Ways and Means Committee, in a statement. “We know Main Street businesses employ most of the workers, and this study shows they pay lots of taxes too. The President’s plan to raise their taxes further in order to cut tax rates for big business is simply a non-starter. Tax reform needs to be comprehensive, and it needs to level out the tax burden paid by businesses of all types.”
The S Corporation Association plans to use the new study, along with a previous study from Ernst & Young measuring employment levels at pass-through entities, to fend off efforts at corporate-only tax reform.
National Federation of Independent Business president and CEO Dan Danner also pointed to the results of the study. “The U.S. tax code is unfair and complex,” he said in a statement. “Today’s study provides valuable data that confirms small businesses currently pay a higher effective tax rate than many large corporations. This study delivers a strong counter argument to the President’s announcement last week that corporate-only tax reform is the best path. Over 75 percent of all small businesses in the United States are taxed at the individual rate—signifying the need for comprehensive reform that addresses both individual and corporate taxes. NFIB will continue to advocate for a level playing field so that small-business owners can create jobs and grow their business.”
For a copy of the tax study, click here.