As we previously mentioned, the Senate Budget Committee held a hearing yesterday to discuss various proposals to “make the wealthiest people and largest corporations pay their fair share of taxes.” It was predictably dull and partisan. There was, however, one moment of “Oh, that’s interesting.”
It started when Senator Tim Kaine (D-VA) spoke about the concept of good tax policy, and where the tax code should go:
I think there’s a lot of big ideas about tax reform that are out there…I hope we might get into a big, structural tax reform discussion.
I’m a little bit nervous – I think we’ll probably get a proposal from the White House dealing with taxes – potentially as a pay-for for an infrastructure plan. And they might all be individual items that I approve, but it’s not really going to be ‘tax reform.’ I think it’s just going to be a readjustment back from what we did in 2017. And I’d love to have a significant discussion about tax reform.
At the end of his comments, Senator Cain specifically cited efforts by Senator Johnson (R-WI) to level out the tax rates imposed on different types of income. Senator Johnson followed by outlining his vision for a more efficient system for taxing business income:
Close to 95 percent of businesses have their business income taxed at the ownership level…So what I was proposing is, make all business income taxable at the individual level. Turn C corps into pass-throughs. This is doable… [This system] would put a little more pressure on corporations to divest themselves of all this pent-up capital, and pay more dividends, for a more efficient allocation of capital. It would incentivize low-income earners to become shareholders, and incentivize corporations to distribute income.
Scott Hodge, President of the Tax Foundation, added the following observations:
I think moving toward what you might call an integrated system for corporate taxation is the right approach. It removes that double layer of tax, and provides some equity there, as you suggest, with a more progressive rate on the individual side. More from
Senator Johnson:
And by the way, a very small percentage of C corporation income is double taxed. So much of these shares are owned by nonprofits, foundations, pensions, that type of thing; the double taxation of dividends doesn’t happen all that much. So there’s a lot of income that we never tax, and quite honestly some of this massive wealth has been accumulated because with the C corp status, you never really pay dividends…and it’s never really subjected to tax.
S-Corp has been an advocate of integrating the corporate code and moving to a single business tax system for two decades. Tax business income once, tax it at reasonable rates, and move on is our mantra. We were disappointed when Senator Hatch’s ideas never matured four years ago and we still maintain the 2017 law was a missed chance to permanently reform our Tax Code.
So it was refreshing to see yesterday’s otherwise predictable hearing on class warfare get hijacked by an interesting and earnest discussion of what makes for good tax policy. As Dr. Eric Toder said more than a decade ago in his Senate testimony, “the ideal way to tax business income is the way we tax S corporations.” S corps for everyone! You can bet we’ll be reaching out to the offices of Johnson and Cain to see how we can help move this effort along.