Webinar Recap: Voters, Taxes, and the Midterms
As we head into the midterms, longtime S-CORP allies David Winston and Myra Miller of The Winston Group joined us to walk through their latest polling on tax policy, spending, and where the voters stand heading into the next big tax fight.
With concerns over debt, deficits, and Social Security’s pending insolvency mounting, the Winston Group’s research suggests Main Street enters the debate from a position of strength, but only if we build a foundation of understanding upon a number of key economic realities.
As we’ve covered before, when voters are asked what is the maximum the biggest corporation or wealthiest taxpayer should pay in taxes, they consistently cite a “maximum acceptable rate” that’s well below what’s actually being paid. We don’t face a pollical challenge, we face an education challenge.
Another misperception is the narrative that the tax cuts in 2017 and 2025 are depriving the government of needed revenue. The latest budget numbers tell a completely different story. Here’s David:
During that time frame, revenues increased 58 percent. And everybody was talking about how much the bill was going to cost, and in fact, revenues increased by a significant margin. Individual tax revenue increased 67 percent, and corporate tax revenue increased 52 percent. So what was the problem here in terms of the deficit? Well, actual federal spending — government spending — increased 76 percent.
We face a spending challenge, not a revenue challenge.
And even where voters seem open to raising rates, that support is fragile. On the idea of taking the top rate to 40 percent, Myra noted that support flips fast once small businesses enter the picture:
Introducing the fact that raising that top rate would apply to small and family-owned businesses overwhelmingly flips voters, Republicans, and independents to opposing that. So this is an ongoing education challenge — just making sure people know when we talk about raising that top rate, who you’re actually going to be hitting, which is small family-owned businesses.
So the voters and the numbers are on our side. We just need to let people know it — making sure Congress, staff, and voters alike have the facts before the next big tax bill lands.
Got Revenue? Yes, We Do.
One of the narratives Main Street needs to counter is that the tax cuts enacted in 2017 and 2025 are depriving the federal government of necessary revenue. As our friends at the Winston Group make clear in a recent video, revenues from individuals and corporations alike are up sharply, even when inflation is taken into account:
Here’s what they say in the accompanying write-up:
- From 2017 to 2025, revenues to the federal government increased 58%. Inflation increased 31% over that same timeframe, but revenues increased at almost twice the rate as inflation.
- Individual income tax revenue increased 67%.
- Corporate tax revenue increased 52%. With the lower corporate tax rate from the 2017 Tax Cuts and Jobs Act, US companies came home and we are seeing a remarkable increase in revenues coming from corporate taxes.
- Despite the positive trends in revenues, government spending has gone up 76% in the same time period, outweighing the benefits of the increased revenues.
This graph from Claude illustrates the point – revenues from corporate and individual tax collections are up sharply since 2017, even when robust inflation levels are taken into account:
A few items worth flagging:
- Individual & pass-through receipts roughly doubled in nominal terms from 2017 to 2025, driven largely by wage growth and a surge in investment income in 2021–2022. As we noted at the time, the individual and pass-through revenues never dropped post-TCJA, as the lower rates, increased deductions and credits, and more generous expensing provisions were largely offset by the bill’s expansive base broadening.
- Corporate receipts, on the other hand, fell sharply in 2018 due to the lower corporate rate and new expensing rules. By 2024, however, that decline had fully reversed with collections coming in at well over $500B before OB3’s restored expensing provisions pulled 2025 receipts back down. You can try to argue that lower rates and faster capital depreciation don’t encourage investment and growth, but it’s kind of staring us in the face here, no?
So, federal revenues post-tax cuts are strong and growing. How about spending? Has it been reigned in post-COVID? No:
As the chart shows, federal spending is well above the 50-year average and continues to claim a bigger share of the economy than it did pre-COVID:
- Years 2017–2019 were close to the 50-year average of 20.3% — spending wasn’t historically elevated heading into the pandemic.
- FY2020–2021 are the outliers at over 30 percent of GDP, a level of spending not seen outside World War II.
- Since then, spending has settled into the 22–25 percent range, still meaningfully above the 50-year average. Notably, spending in 2025 is barely different from 2022, showing the “structural” elevation in spending that took place during the pandemic.
Bottom line – federal tax collections are historically high and continue to grow at robust rates, but federal spending is growing even faster and is simply unsustainable. This explosion of spending has been noticed. As our Winston friends point out, “The electorate believes the larger cause of the deficit is spending too much rather than taxing too little.”
The electorate is correct.
Wage Cap Worries
S-Corp has argued that fixing Social Security’s pending insolvency will require some creative thinking, including scrapping outdated, harmful wage taxes. They were a bad idea when Social Security was created, and they’re an even worse idea now. It’s an aggressive approach, but given the size of our fiscal challenges, now is the time for aggressive policies.
A recent op-ed by Senators Elizabeth Warren and Bernie Moreno moves in the opposite direction by subjecting all wages to the Social Security tax. It seeks to “fix” the problem of Social Security insolvency the way Congress always has – by throwing more money at it.
As noted by the Tax Foundation, this massive rate hike might reduce some of the Social Security deficit, but it also would result in a smaller economy, fewer jobs, and less revenue than what the proponents expect. What’s more, it would take us full circle, resurrecting the broken tax code that existed in the 1950s and 1960s, when individual rates were really high and the wealthy paid much less in taxes. Here’s why.
Lifting the Social Security wage cap would impose a 12.4 percent rate hike on anyone making more than $184,500 a year in wages. This increase would be on top of existing income taxes, including the Medicare tax (up to 3.8 percent), the federal income tax (up to 37 percent), and any applicable state and local taxes. Add all that up and a worker earning $200,000 would see their marginal rate rise to over 40 percent. Top earners would pay around 60 percent.
Meanwhile, tax rates on corporate income and capital gains would stay the same. You can see the problem here:
Rates this divergent are simply unsustainable. We’ve seen gaps like this before and two realities emerged – first, the wealthy paid little in taxes, far less than they do today. The most recent estimates have the top one percent paying 38.4 percent of all individual income taxes, whereas the same group paid only 25.8 percent pre-1986 tax reform.
Second, pre-tax reform those wealthy taxpayers used C corporations and other means to shelter their income and avoid the higher rates.
In the 1960s, the top tax rate on wage income was 70 percent while the top corporate rate was 46 percent. That 24-percentage point differential encouraged high income taxpayers to form corporations to delay realizations and access the lower corporate rate. They also loaded up the business with all sorts of questionable expenses. The goal was to shift as much income into the corporation as possible while using deductions and credits to minimize how much was subject to tax. As Douglas Sykes noted at the time:
[C]ommon tax planning techniques which might be employed to lessen the impact of federal income taxes… include, 1) tax motivated incorporations, 2) utilization of the maximum tax on personal service income, 3) income averaging, 4) the use of tax-sheltered transactions, and 5) nonqualified deferred compensation plans.
The rate differential under Warren-Moreno would be bigger – they would impose a top federal rate over 50 percent on wages while taxpayers organized as C corporations would pay just 21 percent. Guess where the money is going to go? The bigger the tax rate gap, the more pressure taxpayers feel to shift income into C corporations and other forms of income that allow for deferral and, ultimately, a lower rate.
This isn’t just a C corporation issue. The proposal would put enormous pressure on the pass-through structure as well. The current rules that apply wage-type taxes (HI, FICA, Self-Employment, NIIT) to the incomes of pass-through owners are a mess and a source of constant debate and tinkering, and that’s with a rate differential of just 3.8 percent for incomes above $200,000. What sort of games would be justified if the differential were 16.2 percent?
What should Congress do? Instead of increasing the tax rate gap, Congress should reduce it by taxing all forms of income once and at the same top rate. The Single Tax System would eliminate incentives to shift income from one place to another while reducing the economic harm caused by the double corporate tax.
Eliminating wage taxes, meanwhile, would free employers and employees alike – workers could keep more of their wages and employers would no longer be unpaid tax collectors subject to enormous costs and risks. Swapping out wage taxes for a VAT, for example, would put Social Security back on a sound footing without destroying the economy.
250 years after the first tax revolt, it’s time for another one. Let’s build a tax code that works for workers and investors alike. Or you could just raise tax rates and hurt everybody. Your choice.
Preventing a Double Tax
Last month, we outlined why the Joint Committee on Taxation’s interpretation of new Section 68 could subject trust and estate income to an unintended second layer of tax.
Earlier today, S-Corp took the next step, sending the following letter to Treasury’s Office of Tax Policy urging the Department to use its regulatory authority to preserve the longstanding conduit treatment of trusts and estates:
Dear Assistant Secretary Kies:
On behalf of the S Corporation Association, we write to further describe the issue we raised earlier regarding the possible application of the 2/37ths itemized deduction reduction under new IRC Section 68 to the income allocation deduction provisions for estates and trusts under IRC Sections 651 and 661 (the “distribution deductions”), as well as our explanation of how it can be resolved in a manner that does not disrupt the tax mechanics for estates and trusts and their beneficiaries.
New IRC Section 68 was enacted because, as stated in the House Report, “the Committee believes that a simpler overall limitation on the benefit of itemized deductions is appropriate, in order to limit the disproportionate benefit that the highest-income households receive from these deductions.” Accordingly, “the amount of an individual’s itemized deductions otherwise allowable for a taxable year is reduced by 2/37 of the lesser of the amount of itemized deductions otherwise allowable for the year or so much of the taxable income of the taxpayer for the year (determined without regard to the provision and increased by the amount of otherwise allowable itemized deductions) as exceeds that dollar amount at which the 37 percent rate bracket under section 1 begins in respect of the taxpayer.” H Rept. 119-106, Book 2 of 2, May 20, 2025, at 1480-1481 (emphasis added).
There is nothing in the legislative history to suggest that there was any intent to modify the operation of the distribution deduction provisions contained in IRC Sections 651 and 661, which merely allocate income between estates and trusts on the one hand and their respective beneficiaries on the other. In general, IRC Sections 651, 652, 661 and 662 simply provide that income of an estate or trust that is required to be distributed currently or otherwise properly paid or credited to beneficiaries is to be deducted by the estate or trust and “included in the gross income of the beneficiar[y][ies].”
For individuals, the term “itemized deductions” is commonly understood to be those deductions “itemized” on Schedule A of the individual Form 1040 federal income tax return. There is no similar clarity for estates and trusts. IRC Section 67, which deals only with “miscellaneous itemized deductions” and provides that they should only be allowed to the extent they exceed 2% of “adjusted gross income,” specifically provides that the distribution deductions “shall be treated as allowable in arriving at adjusted gross income.” There is no corresponding provision in IRC Section 68, but that is not determinative.
The distribution deductions are not “itemized deductions” in any sense commonly understood, by either legislators or taxpayers. They are merely the nomenclature used to allocate income between estates and trusts and their respective beneficiaries. IRC Section 641(b) provides that “[t]he taxable income of an estate or trust shall be computed in the same manner as in the case of an individual, except as otherwise provided in this part [I of Subchapter J of the IRC]” (emphasis added). That “part” includes the distribution deductions.
The above-described statutory language of IRC Sections 68, 641 and 651-662 clearly does not mandate that estates and trusts must disallow 2/37ths of their distribution deductions (i.e., approximately 5.4%) for distributed income when 100% of that distributed income is already included in the taxable income of their respective beneficiaries. In fact, effectively requiring estates/trusts and their beneficiaries to be taxed collectively on 105.4% of their actual distributed income would be entirely inconsistent with “this part.” Nor would that be consistent with any obvious or implicit legislative intent. The Regulations should confirm that such overinclusion is not required.
We understand footnote 102 of the Blue Book prepared by the staff of the Joint Committee on Taxation for Public Law 119-21 implies otherwise. It states that “the itemized deductions for an estate or trust include (without limitation) the personal exemption under section 642(b) and the deductions for beneficiary distributions under sections 651 and 661.” The footnote states that IRC Section 641(b) (quoted above) provides “that the taxable income of an estate or trust generally is computed in the same manner as in the case of an individual,” but fails to refer to the critical “except as otherwise provided in this part” language also quoted above. The Supreme Court has noted that Blue Books are not legislative history. See United States v. Woods, 571 U.S. 31, 47–48 (“Blue Books are prepared by the staff of the Joint Committee on Taxation . . . [and are] . . . written after passage of the legislation and therefore d[o] not inform the decisions of the members of Congress who vot[e] in favor of the [law] . . . [and] [p]ost-enactment legislative history (a contradiction in terms) is not a legitimate tool of statutory interpretation.”).
In short, the Blue Book is simply another secondary authority. That point is acutely important when all of the other secondary authorities, including the American Institute of Certified Public Accountants, the American College of Trust and Estate Counsel, and the New York State Bar Association Tax Section, take an opposite position.
The impact of this issue is particularly significant for closely held businesses (including S corporations) that are frequently owned through trust structures. Trusts play a critical role in facilitating family ownership, succession planning, and long-term stewardship of S corporation businesses. Moreover, decedent estates often own stock of S corporations when founders and other shareholders die, whether unexpectedly or otherwise. Applying the new IRC Section 68 limitation to trigger taxation of more than 100% of income would increase the effective tax burden on normal pass-through business income and undermine long-standing tax policy favoring a single level of tax for both S corporations and trusts and estates.
We respectfully submit that the Treasury Regulations should confirm that IRC Section 68 does not apply to the distribution deductions under IRC Sections 651 and 661. This would ensure the deduction disallowance would not apply to amounts already includible in the gross income of beneficiaries under Subchapter J. We would welcome the opportunity to work with you to address this issue promptly.
The bottom line is Treasury has both the authority and the opportunity to resolve this issue through regulation. We appreciate the Department’s consideration and look forward to working together to ensure the final rules reflect both the statute and Congress’s intent.
NIIT? Just Say Nyet
Long-time S-Corp ally George Callas is out with a great piece on the history of the NIIT and how the effort to expand the tax to active business income is nothing more than a money grab built on revisionist history. Congress exempted active business income from the NIIT on purpose, and for good reason.
This is a big deal for S corporations. As George explains:
Despite this extensive effort by both Congress and Treasury to limit the NII tax to taxpayers who “lived off investments,” the proponents of higher taxes are now characterizing the exemption of active business income as some sort of unintended loophole that should be closed. In 2021 then-President Biden first proposed this tax increase in his fiscal 2022 budget proposal, claiming that the current design “is unfair, inefficient, distorts choice of organizational form, and provides tax planning opportunities.”
Later that year, the House passed the Build Back Better Act, which adopted the Biden proposal and raised $252 billion over 10 years. The Ways and Means Committee described the proposal as closing “the loopholes that allow some wealthy taxpayers to avoid paying the 3.8 percent Medicare tax,” but — as with the creation of the NII tax in the ACA — failed to put any of that revenue into the Medicare program. Rather than extend Medicare solvency, the House preferred to use the money to pay for new social programs and green energy subsidies.
So while most C corporation income is taxed at a flat 21 percent with no additional tax owed – most C corporation shareholders are tax free or tax advantaged, after all – the focus by some policymakers is to take the higher pass-through rates and push them even higher:
Imposing the tax on business owners whose business income is subject to the top federal income tax bracket would increase their marginal rate from 37 percent to 40.8 percent. (The subset of this income that is eligible for the 20 percent deduction for qualified business income would see its marginal rate increase from 29.6 percent to 33.4 percent.)
Would these higher rates result in more revenues? Not likely.
[A] new study by three economists at the Joint Committee on Taxation estimates that the revenue-maximizing individual income tax rate is only about 40 percent, meaning that as one approaches that tax rate — say, from 37 percent to 40.8 percent — little added revenue is raised because the resulting economic damage reduces revenue in an amount roughly equal to the revenue raised by the tax directly. That the proposal’s negative impact on GDP largely offsets the direct revenue raised casts doubt on previous revenue estimates that failed to account for the proposal’s macroeconomic impact.
Meanwhile, we are all worse off:
But if the revenue effect is a wash, the economic effect is not. Revenue-maximizing does not mean economy-maximizing, and the fact that we are even approaching the revenue-maximizing rate is evidence that such high rates are damaging the economy. As Jared Walczak, senior fellow at the Tax Foundation, says, “The slope of the curve before it goes flat is highly relevant here” (emphasis in original). And as that slope’s steepness declines, Americans are made worse off.
Where does that leave us? George sums it up nicely:
Make no mistake — Biden, Harris, and others are engaging in revisionist history to justify increasing tax rates by nearly 4 percent on family businesses and risk-takers. They want to complete the deception by turning the unearned income Medicare contribution into something that is neither on unearned income, nor about Medicare, nor a contribution. The idea should be abandoned.
Exactly.