Responding to press reports that the Obama administration is considering hitting small business with more tax hikes, U.S. Senator Orrin Hatch, R-Utah, ranking member of the Senate Finance Committee, called on the White House to take these tax increases off the table that threaten to “destroy the economic recovery our nation deserves.”
“What does this administration not understand?” Hatch asked on Friday. “Hitting America’s small businesses with job-destroying tax hikes, as the President proposed in his budget last week, is not how we right our economy and jump-start job creation. And, if that wasn’t bad enough, now the administration is talking about subjecting them to double taxation. With the vast majority of small businesses—the engines of job creation in our economy—organized as flow-through business entities, this latest idea being pushed by Secretary Geithner will pose a serious threat to the economic health of American entrepreneurs. This is a terrible idea and I urge the White House to reverse course and stop tax increases that will threaten the economic recovery our nation deserves."
During last week’s Senate Finance Committee hearing on the budget, Treasury Secretary Tim Geithner said, “Congress has to revisit this basic question about whether it makes sense for us as a country to allow certain businesses to choose whether they’re treated as corporations for tax purposes or not.” Bloomberg News reported Friday that Geithner reiterated this recommendation this week in a meeting with reporters.
Flow-through businesses are entities that do not pay tax themselves, but whose income flows through to each business owner’s tax return and is therefore taxed to the business owner at their individual income tax rate. Under current law, businesses have the option to pay income tax as a corporation or through another structure that would allow the business income to “flow-through” to the owners and be reported on the owners individual tax returns. According to the nonpartisan Joint Committee on Taxation, 50 percent of all flow-through business income would be subject to the tax rate hikes proposed by the Obama Administration's budget released last week.
Although Geithner asserted that flow-through business income is largely made up of hedge funds and law firms, data from the Small Business Administration found that of firms with more than $50 million in gross receipts, only 18.7 percent account for hedge funds and law firms. Should the proposal to increase taxes on flow-through income be enacted, a whole new level of taxation could be imposed on American small businesses, Hatch’s office warned.
The Obama administration has proposed to raise the taxes on carried interest. Partners in venture capital and private equity firms are able to be taxed on carried interest at the capital gains rate of up to 15 percent, instead of the ordinary income rate of up to 35 percent.
Hatch has long advocated for comprehensive tax reform to spur investment, economic growth, and job creation in the nation. In a speech Monday, Hatch outlined the need to overhaul the U.S. tax code an American Action Forum event at the Newseum, in Washington, D.C. He cited President Reagan's 1986 tax reforms as a blueprint to follow for curren tax reform efforts.
"President Reagan did what Presidents are supposed to do," said Hatch. "He led. President Reagan took the initiative and the risk. He put tax reform on the table before the 1984 national elections. After winning a mandate for reform, President Reagan listed three criteria for a reformed system. Those criteria were fairness, growth and simplicity. Those were the criteria then, and they remain the criteria today."
This week, the Senate Finance Committee will hold the first in a series of hearings in this Congress examining why the tax code needs reform. Hatch indicated that he intended to keep Reagan's three criteria in mind during the hearings.
"You will see the Senate Finance Committee, on a bipartisan basis, start the tax reform process for this new Congress," he said in his speech Monday. "It will be a workman-like effort. We will methodically examine every feature of the tax system. We will conduct that examination with President Reagan’s three criteria as our guide posts. We will be looking at the fairness of the system. We will be looking at the efficiency of the system, with a particular emphasis on the anti-growth features of the systems. We will be looking at the complexity of the current system. After that examination, I’m optimistic that we will be in a position to re-build the system in a way that meets President Reagan’s three criteria."
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