In renewing his campaign for corporate tax reform, President Obama has reopened a fierce debate over the effect certain tax changes would have on small businesses.
During a speech last week, the president unveiled his latest plan to revive the economy, including a proposal to lower the tax rate for corporations. Currently at 35 percent, the rate is one of the highest in the world, and bringing it down to a more globally competitive level has been a priority for Republicans.
Obama proposed dropping it to 28 percent, and in exchange, he asked conservatives to agree to spend more on economic stimulus projects — a compromise that has not changed much since he offered it to avert the so-called fiscal cliff late last year.
Immediately following the speech, a number of small business groups criticized the administration for continuing to push for corporate-only tax reform without lowering rates for individuals. A number of them noted that most small firms are structured as pass-through entities, meaning their owners pay taxes as part of their personal taxes; most of them, therefore, would not benefit from tax reform that only reduces rates for corporations.
“A corporate-only approach to tax reform will ensure that small business shoulders a much greater tax burden than mega-corporations that have been gaming the system for years,” Dan Danner, president of the National Federation of Independent Business, said in a statement.
It is a variation of the same argument he and other small business advocates used to push back against the administration’s efforts to raise taxes on the wealthy at the end of the year — essentially, that small business tax rates are directly tied to individual rates.
So, by raising individual rates, they warned that the government would take money away from some of the nation’s most successful entrepreneurs; money those individuals might otherwise have invested in growing their firms. In the end, policy makers agreed to lift rates for those earning annually more than $450,000 to 39.6 percent.
Seven months later, some small business leaders are urging the administration to roll back those rates.
“The president’s goal to consider only corporate tax reform leaves out small businesses, our nation’s most robust job creators,” Rep. Sam Graves, chairman of the House Small Business Committee, wrote in an e-mail, arguing that most small employers “don’t stand to benefit under the president’s plan.”
The Weekly Standard, a conservative newspaper, published a story last week arguing that Obama’s corporate-only proposal suggests the president thinks tax rates “Should Be 28% for Corporations, 40% for Small Businesses.”
Some say that is a gross misrepresentation of the numbers.
On the opposite side of the tax debate, John Arensmeyer, president of small business lobbying group Small Business Majority, noted that only a small fraction of pass-through small businesses make enough money to pay higher than the current corporate rate. Citing congressional analysis, he said that even if the corporate rate dropped to 28 percent, more than 90 percent of small employers would still be left paying a lower rate than corporations.
“It’s a miniscule fraction of small business owners paying the top rates, the ones above the corporate rate,” Arensmeyer said in an interview.
Indeed, Congress’s bipartisan Joint Committee on Taxation last year estimated that only about 3 percent of pass-through small business owners pay taxes in the top income brackets. The Center on Budget and Policy and the Tax Policy Center put the number even lower, at about 1.5 percent.
Critics of the president’s latest plan are simply “rehashing a debate we had last fall about the individual rates,” Arensmeyer said.
Meanwhile, Arensmeyer believes the administration’s proposal has several points small employers can get behind, including fewer tax deductions and loopholes, especially for firms that exploit tax havens overseas. A number of reports have shown those loopholes are exploited much more often by large corporations than small businesses.
Obama also called for a simpler tax filing process for business owners and an increase in the amount of equipment investments employers can write off on their taxes—both of which would save companies time and money.
Most importantly, though, Main Street would benefit from the injection of additional federal funding into infrastructure projects and other job-creation programs, Arensmeyer said. His group’s polling has shown that small firms are being held back not so much by high taxes as much as they are by low sales and weak consumer demand.
“More jobs and more money in the hands of middle class consumers means more money that can be spent on products and services from small business,” Arensmeyer said.