Ken Kies is a former head of Congress’ Joint Committee on Taxation and one of Washington’s most respected tax experts. Today he has a succinct and highly persuasive defense of the Section 199A deduction that’s worth the attention of tax writers.
In a letter published in Tax Notes, Kies makes clear that C corporations are already tax advantaged when compared to pass-through businesses, and that paring back 199A would only make the imbalance worse:
Current law should be retained in its entirety. Taking into account all the proposed changes in the pending legislation, passthrough businesses would wind up being taxed more heavily than C corporations, even if current law section 199A is retained in its entirety.
Kies bases this position on the relative rates embraced by the Neal legislation, under which. S corporations would pay 46.4 percent, while C corporations would pay just 26.5 percent.
Kies addresses the double corporate tax too. As we’ve written many times before, the concept of the “double tax” is a relic, as the bulk of corporate earnings today aren’t subject to it. Kies illustrates this point by referencing a 2016 study conducted by the Tax Policy Center:
In the United States it’s common to talk about the double tax on corporate earnings. As a general proposition, it’s not fake news: A corporation pays tax on its earnings and the owners of corporations — that is, the shareholders — generally also pay tax on any remaining earnings that are distributed to them.
Based on the best available data, it’s estimated that no more than 9 percent of annual corporate profits are subject to tax a second time, and no more than 14 percent will eventually be taxed upon later distribution (that is, as taxable pension or retirement account distributions). That means that only around a maximum of 23 percent of U.S. corporate earnings ever face a second layer of taxation.
When an S corporation earns a dollar under the Neal bill, it retains just 54 cents. A public C corporation, on the other hand, can keep 74 cents. Imagine a market where your business is paid 37 percent less than its competitors. How would you compete for jobs, employees, market share? You can’t, is the simple answer.
The logical conclusion of such a tax system is the rapid expansion of Amazon and Apple, all at the expense of Main Street. That’s good news for the billionaires whose wealth is tied up in public securities, but it’s bad news for the communities and workers who rely on private and family-owned companies.
Ken Kies’ message is simple: “Current law section 199A should be retained in its entirety. Doing so will still leave passthroughs more heavily taxed than C corporations, but removing any of the benefits of section 199A will only make the disparity worse.” We could not agree more, and urge lawmakers to reject this poorly conceived bill.