Corporate-Only Tax Reform Still a Bad Idea

Today, President Obama is announcing a repackaging of the corporate tax reform proposal he put forward back in 2012.B Based on the White House fact sheet, the plan is a restatement of his 2012 plan coupled with a call to raise bone-timeb revenues to pay for new spending.

To recap the 2012 plan, the President proposed to:

  • Cut the C corporation top tax rate to 28 percent;
  • Reduce the top rate on C corporation manufacturers to 25 percent;
  • Eliminate tax deductions, preferences and credits used by C corporations and pass-through businesses alike to offset the lower C corporation rates; and
  • Increase expensing limits to $1 million.

There are many other details included in the 2012 plan, but these are the big ideas, and with the limited exception of increased expensing, they uniformly spell out a bad deal for S corporations and other pass-through businesses.B In effect, the Presidentbs plan calls for raising taxes on pass-through businesses in order to cut them for larger C corporations.

How much?B Our 2011 study from Ernst & Young showed that pass-through businesses will see their tax burden rise by 8 percent ($27 billion) per year under budget neutral, corporate-only tax reform.B Industries most affected by the tax hike are agriculture (22 percent), construction (9 percent), retailers (9 percent), manufacturing (8 percent), and real estate (8 percent). This same study made clear that pass-through businesses employ the majority of private sector workers in the US.

So the President is proposing to hike taxes on the majority of employers in order to cut them for a smaller segment of C corporations.

Moreover, these estimates came before the recent rate hikes on pass-through businesses, so the total impact of the Presidentbs proposal today should be higher.B To the extent the President wants to raise revenue, that too would increase the hit to pass through businesses.

Ways and Means Chairman Camp and Finance Committee Chairman Baucus have both committed to comprehensive tax reform that addresses both the individual and the corporate tax codes because itbs the only way to increase the competitiveness for all US employers while making the tax code more fair and simple.B Just last week, more than 70 national trade groups wrote Congress to reiterate their support for comprehensive reform.

We support the efforts of the tax committee Chairmen and call on them to reject the idea of bcorporate onlyb tax reform. It was a bad idea when it was first proposed in 2012.B Itbs a worse idea today.

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