Among the many tax reform issues to be resolved in the months ahead is whether or not to produce a comprehensive tax reform bill or simply one limited to corporate reform.
President Obama recently offered his own plan for corporate reform, triggering a number of negative responses.
“Once again, small businesses are being left out of President Obama’s economic plans,” said House Small Business Committee chairman Sam Graves, R-Mo. “Small businesses commonly file as individuals and often face steeper tax rates than larger companies, yet it is these firms that will create the jobs necessary for a full and robust economic recovery. Tax reform must be comprehensive so that all businesses, both large and small, can see relief from the burdensome tax code.”
And a study by the National Federation of Independent Business and the S Corporation Association reinforces the need for tax reform, according to NFIB president Dan Danner (see S Corps Pay Highest Effective Tax Rates). Because of recent tax law changes, for the first time since 2002 the top marginal tax rate that applies to individuals and pass-through businesses is significantly higher (44.7 percent) than the top marginal tax rate that applies to C corporations (35 percent).
“The U.S. tax code is unfair and complex,” said Danner. “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 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,” he added.
A contrary view is held by Sabrina Parsons, chief executive of Palo Alto Software, which provides free content to small businesses on how to plan, manage and track performance for small businesses.
“In reality there is a very small minority of small businesses out there making more than $450,000 per year, and that’s what the debate is about—individual tax rates,” she said.
“I would like to see comprehensive tax reform,” she added. “A corporate tax reform that lowers the rates and eliminates the loopholes available to large corporations would be advantageous.”
“The debate should focus on small business and not wealthy individuals—when you read between the lines, they’re really aiming at people making more than $450,000,” said Parsons. “Critics say that the corporate-only approach is bad for small business when really it’s bad for wealthy individuals. Lowering the corporate tax rate from 35 percent to 28 percent should have nothing to do with the tax rates on wealthy individuals.”
“If you’re a pass-through that’s making more than $450,000, it may be time to talk to your CPA and think about changing to a different type of entity,” she said. “While they are trying to couch the debate in terms of small business, it’s really just about individual tax rates.”
What small business really needs is greater access to capital, according to Parsons. “Small business needs reforms that help them get access to capital,” she said. “Large corporations have always had it, but we penalize small businesses by forcing them to put their personal assets on the line when they’re trying to grow their business. When access to capital is easier to get, more small businesses will be created and flourish.”