January 25, 2015

Corporate-Only Tax Reform Would Hurt U.S. Small Business Competitiveness

President Barack Obama and Congressional Republicans may not agree on many policy issues, but one thing on which they do see eye-to-eye: the U.S. corporate income tax is too high and must be lowered in order to make U.S. businesses more competitive globally. While some Republicans favor reducing individual income taxes along with a corporate rate, the president prefers to keep individual rates the same or increase them slightly. A new report indicates, however, that lowering corporate rates while keeping individual rates high would make small- and medium-sized businesses in the U.S. less competitive. 

Last week our partners at the S-Corp Association called our attention to a new study by the Tax Foundation that outlines the economic impact pass-through companies, which pay federal income taxes through the individual tax system, have on the American economy. According to the report, pass-throughs employ 50 percent of the private U.S. workforce and provide 37 percent of the payrolls, and while the number of corporations in the U.S. had declined since 1980, the number of pass-throughs has risen. 

The Tax Foundation found most pass-through companies pay taxes at the highest marginal income tax rate and pass-throughs in many states face marginal tax rates that are higher than 50 percent. (The Tax Foundation report includes a state-by-state summary of marginal rates.) The Tax Foundation report concludes, “Tax reform aimed at improving the competitiveness of U.S. businesses needs to address the individual income tax code due to the economic importance of pass-through businesses.” 

MSCI agrees and will continue to fight for comprehensive tax reform in the 114th Congress. To learn more about this issue, see the website for the Coalition for Fair Effective Tax Rates, of which MSCI is a member. We also encourage you to sign this U.S. Chamber of Commerce petition in support of comprehensive tax reform. 

U.S. Treasury Secretary Jack Lew said last week that he is “confident” Congress and the White House can reach an agreement on tax reform. MSCI and other groups whose membership includes a significant number of pass-through companies need your voice, though, to make sure Congress passes a bill that will level the playing for all U.S. businesses, not just C-corporations.