Baucus skeptical of businesses taxed as individuals

Sen. Max Baucus, the Finance Committee chairman, on Tuesday expressed reservations about allowing certain small businesses to pay taxes as individuals, not long after the Obama administration also signaled skepticism on the same issue. 

The Montana Democrat said that those small businesses -- so-called pass-through entities -- were not held as accountable as businesses organized as corporations. 

“I think the development of pass-throughs has not been helpful to the American economy,” Baucus said after a hearing on tax reform in which witnesses also questioned that arrangement. 

“I don’t know the solution,” the senator added, “but I think the problem of pass-throughs is concerning.”

The chairman’s comments further underscore potential difficulty in crafting a tax reform package, an idea which both Republicans and Democrats have said should be looked into. 

Treasury Secretary Timothy Geithner told the Senate Finance panel last month that Congress should “revisit” whether businesses can choose not to be treated as corporations, while also indicating that the corporate tax code could be revamped before the individual one. 

For their part, lawmakers like Sen. Ron Wyden (D-Ore.) and Rep. Pat Tiberi (R-Ohio) are pushing for more comprehensive tax reform, in large part because so many businesses actually pay taxes as individuals. (The National Federation of Independent Business, for instance, estimates that roughly 75 percent of small businesses are organized as pass-throughs.)

At a House hearing last week, small business representatives complimented the flexibility that the American tax code offered to small business owners. 

But a group of academics testified before Senate Finance on Tuesday that a fair number of the businesses paying taxes under the individual code aren’t so small.

Alan Auerbach, a professor of economics and law at the University of California, Berkeley, told the panel that businesses that are not organized as corporations have grown to account for a much larger share of business income than they did several decades ago.

“It doesn’t make sense to have two very different tax systems applying to businesses that operate in a similar fashion,” Auerbach added.

Michael Graetz, a Columbia law professor, had a similar take, noting that less than one percent of partnerships account for 60 percent of that group’s income. (Partnerships are a kind of pass-through entity.)

“We really ought to divide the world between large companies and small businesses,” Graetz said, adding that the U.S. should “not allow the corporate tax to be elective for large businesses.”