Domestic Taxes

Study: Small businesses pay higher effective tax rates

The study comes as the tax reform debate is heating up, with both House Ways and Means Committee Chairman Dave Camp (R-Mich.) and Senate Finance Committee Chairman Max Baucus (D-Mont.) vowing fall markups of overhaul bills.

{mosads}It also serves as pushback against President Obama, who renewed his call to reform only the corporate tax code last week. GOP lawmakers, the NFIB and the S Corporation Association say that idea will leave behind the millions of businesses that organize as pass-throughs and pay taxes through the individual code.

Brian Reardon, the executive director of the S Corporation Association, told reporters on Wednesday that there are “very few select voices that continue to push this idea that you can do corporate-only.”

“Unfortunately, one of those voices is the president,” Reardon added.

Reardon also told reporters that his group was going to push to get the study to congressional offices, ahead of the fall’s work on tax reform.

The study joins a previous report sponsored by the S Corporation Association that found that a corporate-only reform would mean a rate hike for pass-throughs.

A separate study done for NFIB last year found that the individual rate hike that Obama and Democrats pushed for — and eventually got — would cost some 700,000 jobs. Democrats called that study biased.

The new study’s authors said the report was consistent with previous research, done for the Small Business Administration, that also found S corporations and partnerships paid a higher effective rate than corporations.

Sole proprietorships, another kind of pass-through, paid a lower effective rate than corporations, but the majority of those businesses have annual incomes under $10,000 a year.

The new study tries to take into account the rise in the top individual tax rate to 39.6 percent, from 35 percent, as well as new taxes from the president’s healthcare law.

It also said it incorporated a second layer of tax that occurs after corporations hand out dividends. According to the study, the 17.8 percent paid by corporations rises to 27 percent if a multinationals’ foreign income and their use of foreign tax credits aren’t considered.

How to tax corporations’ offshore incomes — many Republicans want to shield most of those earnings from U.S. revenue collectors — is just one of the knotty issues that policymakers will have to tackle when trying to overhaul the tax code.

Groups like the NFIB are pushing for the effective tax rate — what companies and industries actually pay — to be a bigger consideration in tax reform. But some of the biggest high-tech and pharmaceutical companies also lobbying for tax reform already pay relatively low effective rates.

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