Wednesday’s meeting between House Republicans and the President failed to move the needle on deficit reduction, but it did give the top tax writer in the House an opportunity to deliver a message on tax reform. As Chairman Dave Camp (R-MI) stated after the meeting:
“Tax reform done the right way means more economic growth and more jobs. Any path forward for tax reform must be comprehensive to address both the individual and corporate rates. More than half of all business income is earned by pass through entities - most of which are small businesses. We cannot leave them out in the cold, nor can we provide relief to employers while leaving the American people to struggle with the cost and complexity of the current code.”
We need to repeat this message over and again, as demonstrated by yesterday’s Way and Means hearing on tax reform and jobs. The witness list included representatives from big companies like Boeing and Emerson, as well as the National Retail Federation and accounting firm Grant Thornton.
Weighing in for the pass-through team, Grant Thornton managing partner, Mark Stutman, presented a very cogent argument for comprehensive reform, rather than the corporate-only approach championed by the Administration:
“I also urge the members of the Committee not to consider tax reform proposals that would disproportionately burden any one segment of the business community. Dynamic organizations are frequently organized as pass-through entities and have become part of the backbone of American economic activity and a driving force behind expanding American employment.”
The Retail Federation witness made similar points. As Congressman Pat Tiberi (R-OH) observed, “Right on.”
Meanwhile, Congressman Vern Buchanan (R-FL) asked the panel if they agreed that small pass-through businesses should be considered within the tax reform effort. Mr. Stutman replied that S corporations and other pass-throughs are drivers of jobs, so they have to be included in the debate. Rep. Buchanan summed up that, though the President wants to increase taxes on individuals while lowering rates on corporations, he personally would love to reform the corporate rate but doesn’t see how to do it without including pass-through businesses.
Weighing in for the “corporate-only” team was Emerson Vice-Chairman, Walt Galvin, who understandably advocated for cutting corporate rates to help make his business more competitive overseas, but he also asked Congress to reduce the “advantage” enjoyed by pass-through businesses by taxing them as C corporations. Ouch.
As representatives of S corporations, we have been careful not to advocate for higher taxes on C corporations — it would not be good for employment or investment. It certainly would not make the U.S. more competitive. As Galvin’s testimony makes clear, not all members of the C corporation community understand that it works both ways — higher taxes on pass-through businesses will also hurt employment and investment. (We employ the majority of American workers, after all.) These representatives of large, multi-national corporations are actively advocating for higher taxes on closely-held businesses in order to reduce the tax burden on their own particular firm.
Given the reaction by members of the Ways and Means Committee yesterday, this “I win, you lose” approach to tax reform faces an uphill battle. Chairman Camp, Congressmen Tiberi, Buchanan and others have made clear they intend to defend the interests of S corporations and other closely-held businesses, and don’t support the limited approach to reform.