Getting Back to Tax Policy
With this morning’s passage of the budget resolution in the House, it’s full steam ahead on the tax policy front. Fortunately, our friends on the small business committees are focused on what’s important – Congress needs to act now to prevent a massive tax hike on millions of Main Street businesses.
That focus was on full display during a House and Senate joint hearing entitled, “Keeping Taxes Low for Small Businesses” which featured two witnesses from our Main Street Employers Coalition.
Here’s Tom Click – president and cofounder of Patriot Industries, a Virginia-based manufacturer – with more on that dynamic:
One of the most impactful provisions was the 20% deduction for small businesses, which gave pass-through entities like ours the ability to compete on a level playing field with larger corporations. This crucial tax relief enabled us to grow at a faster pace and reinvest in our company and employees. The Section 199A deduction is a critical component of the TCJA that ensures Main Street businesses can remain competitive in an increasingly challenging environment.
…For companies like ours, which employ workers, invest in communities, and contribute to local economies, this deduction has been instrumental in supporting job creation, capital investment, and overall business growth. If Section 199A is allowed to expire, the consequences will be severe for countless small and family-owned businesses across the country like ours. Many firms in our industry already operate on thin margins, and the sudden tax increase resulting from the loss of this deduction would mean a 20 percent tax increase at a time of great uncertainty in the economy. Worse yet, this tax hike would be borne exclusively by pass-through business – which currently supply more than 6 out of every 10 jobs nationwide – and would create a ripple effect across the American economy as a whole.
How would things play out if Congress failed to act? Here’s Tom again with a bleak analysis:
Finally, the expiration of Section 199A would no doubt force many businesses to be sold to larger corporations, thus accelerating the ongoing consolidation of economic power and shifting control away from Main Street and further into the hands of a few dominant corporations. These sales would be triggered not by market inefficiencies or poor business practices, but simply due to an uneven tax code that disproportionately benefits Wall Street over Main Street. This would weaken local economies, reduce competition, and ultimately harm American workers by limiting job opportunities and wage growth.
Later the panel heard from Jerry Akers, a serial entrepreneur and current owner of multiple franchise operations:
Much like the rest of small business owners, the 199A deduction has enabled me to increase investment in new equipment, technology, and facilities, driving growth and innovation, while the extra financial breathing room has allowed me to hire more employees, and provide better benefits to existing team members.
More importantly, this deduction has helped level the playing field, allowing businesses like mine to compete with larger corporations, and provide a level of financial stability that has been very valuable. The thought of these hard-earned gains being jeopardized is deeply unsettling. It’s not just about numbers; it’s about the livelihoods of families, the vitality of communities, and the spirit of entrepreneurship.
As Tom, Jerry, and the other witnesses made clear, Section 199A is not a “loophole” or “giveaway” – rather, it’s a key component of a tax system that recognizes the unique structure and contributions of pass-through businesses. These firms don’t have access to the capital markets like their publicly-traded counterparts. They must rely on their own profits to reinvest, grow, and hire.
As Congress deliberates on the current tax package, we are encouraged that lawmakers continue to focus on Section 199A and its importance to the economy. We look forward to more opportunities to showcase these Main Street success stories and get the message across.
Tax Hike Nonsense
The battle over the Budget Resolution is a spending fight, not a tax fight. There is broad agreement over how to extend the expiring individual and pass-through tax policies, whereas there are significant differences when it comes to spending reductions. The problem for Main Street is some members apparently don’t know the difference.
This chart from CBO tells the whole story. Revenues into the federal government are well above historic norms and rising. Spending, meanwhile, is simply out of control. The federal government used to spend one out of every five dollars as recently as 2019 – it is now one out of four and rising.
One would think any rational policymaker would take a look and conclude that they need to focus on spending, not taxes. One would be wrong. A recent Bloomberg article quotes at least two Republicans open to raising the top individual (and pass-through) rate to 40 percent. According to the piece:
House Freedom Caucus Chairman Andy Harris says he is open to the creation of a new 40% tax bracket for those earning $1 million or more, lending credence to an idea Republicans are considering as a way to offset some new tax cuts.
Harris said in an interview on Monday that he views the millionaires’ tax rate as a “reasonable way to pay for” President Donald Trump’s campaign pledge to eliminate levies on tipped wages.
“You are only raising it a couple of points,” the Maryland Republican added. The current top tax rate is 37% for individuals earning more than $626,350 a year.
The Representative is wrong that it’s a small increase – a top rate of 40 percent would be the highest level since Reagan cut rates back in 1986 – almost 40 years! It would also eliminate about half the benefit of the 199A deduction for affected businesses, assuming they actually get the deduction. For those that don’t, it’s just a tax hike.
The good news is these suggestions were quickly shot down by House leadership, who clearly have no interest in making rate hikes part of their effort to extend the TCJA provisions.
Nonetheless, the Main Street community needs to respond to these suggestions. Taxpayers paying the top rate – including about a million pass-through business owners – represent just 1 percent of all income earners but pay a remarkable 25 percent of all federal taxes.
Moreover, their share of total tax payments is large and rising, even as the top rate has come down. In 1979, the top marginal rate was 50 percent and the top one percent paid 14 percent of all taxes. Today, the top rate is 37 percent and the top one percent pay 25 percent.
Any suggestion these taxpayers are “under-taxed” is laughable.
So is the idea that our Tax Code is anything but progressive. Notice how all the dark areas in the graph reflecting higher income taxpayers is growing, while the lighter areas reflecting lower-income taxpayers has shrunk? That’s a representation of how our Tax Code has gotten more progressive over time.
We expect Congress to work out their differences on spending. We also expect them to reject calls to raise marginal rates. But the Main Street Community needs to beware. The premise that Republicans are unified in opposing rate increases is no longer valid, and we need to work to restore it.
Talking Taxes in a Truck Episode 41: Ryan Ellis on Tariffs, the “Big Beautiful Bill,” SALT, and More
Between tariffs and budget resolutions, it’s been an eventful and busy week here at S-Corp central. To cover it all, we’re joined by three-time podcast guest Ryan Ellis, the President of the Center for a Free Economy and an IRS Enrolled Agent. Ryan gives us his unvarnished take on the tariffs, the Senate budget resolution, baseline budgeting, SALT Parity, Republican tax hikes and more.
This episode of Talking Taxes in a Truck was recorded on April 3, 2025, and runs 33 minutes long.
Clickbait for Tax Hikers
The DC tax community has been buzzing since Axios reported the White House is considering rate hikes to offset their other tax priorities. This from the article:
Some White House officials believe letting income taxes on the very highest earners rise would buy breathing room on other priorities, and help blunt Democrats’ attacks as they seek to extend President Trump’s 2017 tax cuts.
…Under the budget reconciliation rules that Republicans seek to use to extend the tax cuts, that would free up more revenue that could be used to fulfill some of Trump’s populist promises, such as eliminating taxes on tips.
The rumor prompted the Wall Street Journal to publish a scathing editorial accusing Republicans of having “lost the plot about the pro-growth rationale for tax reform.”
So, are rate hikes really on the table? Also, does Axios really know somebody in the Trump White House?
Our reaction is to be extremely skeptical. This tweet from Punchbowl News pretty much sums it up:
Some additional thoughts.
Axios claims “A majority of Americans, including a plurality of Republicans, support raising taxes on wealthier individuals, polls have shown.” The Pew Research poll referenced asked: “Should tax rates on household income over $400,000 be raised a lot, raised a little, lowered a little, lowered a lot, or kept the same as they are now?” Fifty-eight percent of Americans responded the tax rates should be raised verses 36 percent responding they should be kept the same or lowered.
A couple of problems. First, the question is asked in the abstract, without any information regarding 1) how much these taxpayers already pay nor 2) how much respondents think their taxes should be raised.
We’ve addressed this issue many times, but it bears repeating. The American people are very reasonable about the maximum rates anybody should pay — including wealthy families — and the US Tax Code already taxes those families at rates that exceed what Americans think is reasonable.
Our friends at the Winston Group asked voters: “For each of the following, what is the maximum rate at which you think they should be taxed?” The average responses were consistently low, topping out at 31 percent for the wealthy and 17 percent for small and family-owned businesses.
But wealthy Americans already pay more than 31 percent of their income to the federal government. According to the Joint Committee on Taxation, top income earners pay an effective rate of 34 percent, while the bottom 50 percent of taxpayers pay 6.8 percent.
Bottom Line: The Tax Code is already more progressive than most Americans believe is fair.
Second, families making more than $400,000 represent about 2 percent of the population. That means 98 percent of the respondents to the Pew poll are effectively being asked: “Do you support raising taxes on somebody else?” A majority of respondents saying “yes” to that isn’t really news. What is news is how many respondents said no.
They understand that the “raise taxes on the rich” argument is premised on a lie that wealthy families and business owners don’t pay their fair share. According to most Americans, they pay more than their fair share and will pay even more if Congress fails to extend the TCJA’ s expiring provisions.
So count us skeptical of the tax hike story and on the side of most Americans. We support reasonable tax rates for everybody, including all those Main Street businesses that employ the majority of workers out there.
Committee Reviews CTA’s Future
Earlier today a House Financial Services subcommittee held a hearing entitled, “Following the Money: Tools and Techniques to Combat Fraud.” The hearing covered many topics, but the conversation returned time and again to the awful Corporate Transparency Act.
The hearing kicked off with Congressman Warren Davidson (R-OH) – who leads the charge to repeal the statute – making the case for the Treasury Department’s recent overhaul of the CTA rules:
Presumably, operating a business or even a homeowners association, means you are engaged in illicit finance. Meanwhile, our Constitution says that when the government wants to know private information, they need probable cause (or reasonable suspicion) to get a warrant or subpoena. Surely we can minimize the financial harm suffered by Americans exploited by scammers without infringing on their civil liberties or adding ways to make ordinary Americans criminals.
Later in the hearing, our friends at NFIB listed additional reasons to dislike the CTA. Here’s Jeff Brabant:
Small businesses have also faced other forms of phishing and scams from the CTA. I have heard from many small business owners who have sought assistance to file their BOI. Many have had to pay their CPAs or hire an outside counsel to assist with their filings. This is an unnecessary added cost that has increased red tape and compliance burdens for small businesses. Others have fallen prey to profit companies, which may be scam operators, offering to file BOI data. A recent search of “CTA BOI Filing” on Google demonstrates this problem.
…Just last week, an Indiana farmer contacted NFIB regarding one of these scam companies. This farmer had begun the process to file through a scam company but did not complete the filing. Still, this farmer had $249 charged to his credit card. Now, the farmer is searching for a refund but will likely be without redress.
S-Corp’s own inbox is littered with similar solicitations so the experience shared by Jeff’s members is not unique.
The hearing also offered a glimpse into the mindset that allowed the CTA to be enacted in the first place. One member argued that the CTA wasn’t that onerous and that the penalties for noncompliance – including fines and jail time – do not threaten law-abiding owners because they only apply for “willful” violations. What’s so hard about reporting the name, address, date of birth, and driver’s license of a business owner?
These comments reflect three fundamental misunderstandings of the law – 1) the CTA doesn’t just apply to small, simple business structures, 2) the beneficial ownership information (BOI) collected extends far beyond the actual owners of an entity and 3) the information reported must be updated continuously.
First, the CTA is focused on legal entities, not enterprises. A mid-sized business with multiple locations will have multiple legal entities. It will have to file for each of them and supply the correct BOI for each. S-Corp has members with thousands of employees and billions in revenue who will have to file under the CTA. Other members will have to file hundreds of separate reports. There is an entire industry of law firms and CPAs dedicated to CTA compliance.
Second, the CTA defines a beneficial owner as both the actual owners and anybody else exerting substantial control within an enterprise. That includes executives, supervisors, board members, consultants, legal counsel. That mid-sized business might have dozens of so-called beneficial owners. Somebody within the business will have to decide whose BOI gets reported. That’s a willful decision that better be right.
Third, BOI reporting is not just a one-time event. It has to be updated within 30 days of a change. So that mid-sized company will have to review, every 30 days, all their submitted information and update any changes. Did somebody leave the company or get hired? Did we take on new partners? Did anybody move? Every thirty days.
One last thing – the criminals aren’t going to self-report their crimes. The CTA database would have included the personal information of about 100 million law abiding owners and their employees, and little to no information about the crooks.
The good news is this is all in the past, at least for now. The new Treasury rules exempt most businesses from having to file these reports. But the hearing also made clear why a permanent fix is necessary.
The Main Street Community will continue to work with Representative Davidson and other allies to repeal the CTA entirely and replace it with something more thoughtful, targeted, and effective. A risk-based approach that follows the money would be less intrusive and more effective. S-Corp will have more to say on that front in the future.