October 27, 2014

Personal Income Tax Increases Reduce Growth And Employment At Middle Market Companies

MSCI ally the S-Corp Association last week highlighted a new study from tax consultant RSM McGladrey that outlines the consequences of the tax increases passed by the U.S. Congress and signed into law by President Barack Obama as part of the American Taxpayer Relief Act of 2012

This law raised the top personal income tax rate and imposed a new 3.8 percent tax on net investment income and, as a result of these and the other provisions that took effect Jan. 1, 2013, 77 percent of middle market firms paid higher taxes in 2013. Two-thirds of respondents (76 percent) said complying with the tax code was also made more difficult by the law. Companies say current tax law, which reflects the 2013 changes, has prevented their businesses from expanding and has also forced them to cut jobs. According to the report, “More than half reported that the 2013 tax reform legislation contributed to their decisions to reduce workforce or scale back expansion plans” while 66 percent said the new law limited their business’s growth. (Only 10 percent said current federal tax law benefited their companies.) Fifty seven percent of respondents said they raised prices on their customers as a result of the tax changes while 50 percent said they cut research capabilities. 

What should these results mean for U.S. policymaking? McGladrey concludes, “Given the vital role of the middle market in both job creation and economic growth, policy makers would be well advised to carefully consider the opinions of and impact on this important segment when determining future tax policy changes.”