Main Street Business Community Supports Comprehensive Tax Reform

A coalition of more than forty Main Street business groups, including the S Corporation Association, the National Federation of Independent Business, the National Farm Bureau, the Restaurant Association, and the National Wholesalers Association, released a letter today calling on Congress to resist pressure to consider corporate-only tax reform.

As the letter states:

Every day, nearly 70 million Americans go to work at a firm organized as something other than a C corporation. These “flow-through” businesses, structured as S corporations, partnerships, LLCs, or sole proprietorships, represent 95 percent of all businesses and they contribute more to our national income and our job base than all the C corporations combined.

Despite these contributions, recent press reports suggest that the Administration and some Members of Congress support budget-neutral legislation that would reform the tax code for C corporations only. The proposal would be to reduce the tax rate on C corporations and offset those lower rates by eliminating or reducing tax deductions and credits used by all businesses.

That approach means the same firms that just saw their tax rates go up on January 1st will be subject to yet another tax hike, this time in the form of fewer business deductions and a broader base of taxable income.

If these arguments sound familiar, they should. The S Corporation Association and its allies have been warning Congress about the perils of “corporate-only” tax reform since the idea was first floated by the Treasury Department two years ago. It was those warnings that caused us to ask Ernst & Young to study exactly what budget-neutral, corporate-only tax reform would mean to Main Street businesses. The answer: $27 billion a year in higher taxes.

And that was before tax rates on Main Street business went up in January. The hit today would be much higher.

As before, the S Corporation Association supports reforming the corporate tax code. Rates on public corporations are too high. But every argument in support of reducing the corporate rate also applies to the tax rate imposed on pass-through businesses like S Corporations.

Ways & Means Chairman Dave Camp recognizes this key fact and is committed to comprehensive tax reform that addresses the individual, pass-through, and corporate tax codes. We look forward to working with the Chairman and other policymakers to ensure that tax reform is broad and benefits all employers, including those located on Main Street.

Two Budgets, Two Visions

The House and Senate will consider their respective budgets this week. You can find the pertinent documents at the following sites:

There is a lot of commentary flying around about which budget embraces the better vision for America, but we think the analysis by our friend Charles Blahous is the most straightforward. Rather than getting bogged down in opaque world of baselines and savings figures, Charles focuses on the top line numbers instead - how much does the budget spend, how much does it tax, and what happens to the deficit and debt? Here’s his chart for the spending:

As you can see, the there’s a significant difference in the projected size of government between the two budgets. Spending currently is at inflated levels, and the Senate budget would continue those high levels with the prospect of even higher spending in the out years. Meanwhile, the House budget would return spending to around its post-WWII average.

What happens to revenues?

Again, the Senate budget embraces higher-than-average tax collections for the next ten years, calling for an additional $1 trillion in taxes over current policy, while the House would lock in current revenue estimates and calls for revenue-neutral comprehensive tax reform.

So where does that leave the deficits and debt?

The House budget projects balance by the end of the ten-year budget window, whereas the Senate budget would result in steady-state deficits of between two and three percent of GDP for the next decade. Moreover, because the Senate budget fails to tackle entitlement reform, it’s likely those deficits and debt levels would quickly rise in the following decade, placing increased pressure on Congress to raise taxes beyond the $1 trillion tax increase already called for in the Senate budget resolution.

It is this latter concern that has united the business community around the need for entitlement reform. In recent months, the Chamber of Commerce and our Main Street Business coalition have issued broad statements signed by hundreds of business organizations calling on Congress and the Administration to reform our entitlement programs.

This unity of purpose is unprecedented in our experience and should act as a signal of the enormity of the challenge. Unless we reform our entitlement programs, even the most successful tax reform bill enacted today will short lived and have to be revisited by a future Congress.

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