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More Trouble for Small Businesses in Tax Reform Talks

1 min readBy: Kyle Pomerleau

Yesterday, I argued that Obama’s “Grand Bargain” will likely raise the effective tax rate on pass-through businesses.

Today, it seems like there is more trouble for pass-through businessA pass-through business is a sole proprietorship, partnership, or S corporation that is not subject to the corporate income tax; instead, this business reports its income on the individual income tax returns of the owners and is taxed at individual income tax rates. es coming from the Democratic Party.

According to Tax Analysts (subscription required), Charles Schumer (D-NY) is quoted as saying “I don’t think we should lower individual taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. rates. I think the overwhelming majority of our caucus agrees. We think 39.6 percent is about the right rate.”

He believes that after the Democrat’s victory to raise the top individual tax rate this year, he does not want to see the rate go down.

This spells additional trouble for pass-throughs, especially after hearing the President’s plan.

Now it seems unlikely—if Schumer has any sway at all—that Democrats will want to lower the top individual tax rate on individuals and consequently, pass-through businesses.

Currently, these businesses, which make a majority of business income in the United States, have to pay tax rates higher than 40 percent. This is a rate higher than corporations have to pay and much higher than businesses in other countries have to pay. This places a disproportionate tax burden on small business and holds back their competiveness and U.S. economic growth.

Lawmakers need to realize that there are two sides to tax reform. It is great that corporate tax reform is getting the attention it needs, but businesses do not only operate under the corporate tax code. Most business income is taxed under the individual code and reform must happen there as well.

Any fundamental tax reform plan that seeks to grow the economy must consider both sides of the equation.