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October 4, 2021

Congress’ Budget Reconciliation Would Mean Pass-Throughs Would Pay Higher Tax Rates Than Corporations

As Connecting the Dots has reported several times over the last few months, the fiscal year 2022 budget reconciliation being contemplated by U.S. lawmakers would eliminate the 199A deduction that was created for pass-through businesses in the 2017 federal tax reform legislation. Section 199A was enacted to provide rough tax parity between pass-through businesses, which are typically held by a small number of owners (including families), and C corporations.

According to experts at the S-Corp Association, ending the 199A deduction would result in pass-through companies paying income tax rates averaging 46.4 percent, or nearly twice the average 26.5 rate paid by public C corporations. This outcome is particularly problematic since, according to a new study from EY, private companies supply the vast majority of jobs nationally — 77 percent of them, in fact. (Public companies supply just 23 percent.)

As the S-Corp said, “No business structure can survive such an imbalance, so the net effect would be to encourage further consolidation into the few thousand companies traded on the public exchanges. That’s bad for millions of Main Street businesses and bad for the workers and communities that depend on them.”

S Corporation Association board member Tom Nichols also made it clear that ending the 199A deduction will harm workers and consumers. He explained, “Some of that cost will be passed on to customers in the form of increased prices and to employees in the forms of reduced wages and lost jobs. Yes, only entrepreneurs with income over the threshold actually cut the checks, but that doesn’t mean the rest of us don’t pay a good deal of the cost.”

Read the S-Corp Association’s full analysis here and here. MSCI supports the Section 199A deduction and will work with its partners in the business community to oppose any effort to end it.

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