For five years, the S Corporation Association and its allies have asked tax writers to pursue business tax reform that taxes all business income just once and at the same, reasonable top rates. That’s the correct way to tax business income and more than 100 trade groups, including the largest trade groups in the country representing millions of employers, have signed on to this premise.
And for five years, we’ve watched as the tax code moved in exactly the opposite direction.
Instead of preserving rate parity, the combination of the Fiscal Cliff and the implementation of the Affordable Care Act resulted in pass through businesses paying at a top rate nearly 10 percentage points higher than C corporations. Instead of reducing the double corporate tax, President Obama signed into law new polices that raised shareholder taxes dramatically. The result is that the effective marginal tax on business investment today is significantly higher than it was just a few years ago.
No wonder companies and capital are fleeing the United States.
In recent months, however, we have seen signs of hope. First, Finance Chair Orrin Hatch (R-UT) announced he was working on a plan to eliminate the double corporate tax. His plan isn’t due out until June so we haven’t seen the details, but the fact that the Chairman and his staff are spending time and resources pursing policies to create a single layer business tax is promising. A properly constructed integration plan has the potential to address many of the ills the business community faces.
And just this week, Congressman Vern Buchanan (R-FL) introduced legislation on the issue of rate parity. Entitled the Main Street Fairness Act, the bill would cap the top pass through business tax rate at the top corporate rate. Under the Buchanan bill, the same 35 percent top rate that applies to corporate income would also apply to successful pass through businesses. If Congress reduces the corporate rate next year, pass through businesses would get the new lower rate too.
Groups weighing in on the Buchanan bill include the National Association of Manufacturers, the National Retail Federation, and the Associated Builders and Contractors. You can read more about the Buchanan bill here. You can read the S Corporation Association letter on the bill here.
We would like to see the Buchanan bill expanded to apply to all active pass through income, and Congress still needs to repeal the 3.8 percent Affordable Care Act tax that applies to some S corporations and other businesses. We don’t want those concerns, however, to detract from the fact that of the three core Main Street Business principles we outlined five years ago – tax reform should be comprehensive, restore rate parity, and end the double tax — two of those principles are being actively pursued by senior members of the tax writing committees.
That’s a positive sign, and something we plan to build upon in the coming months.