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It’s impossible to say just how many great companies and brilliant ideas were born in an American garage, a barn or a basement. One thing we know for sure, if we’re to carry on generating the same kinds of earth-shattering ideas, the U.S. needs to take some ground-breaking steps on federal tax reform.
Over the past decade there has been a shift in public sentiment regarding our federal tax code. The cry for “comprehensive tax reform” has evolved from a standard Republican talking point to a bipartisan national priority. According to a 2015 study by the Pew Research Center, 59 percent of Americans feel that “there is so much wrong with the federal tax system that Congress should completely change it.” Only 38 percent believe the system works fairly well and needs “only minor changes.”
With Tax Day right around the corner, we think it’s time for small manufacturers and others to start raising the “inside the beltway” rallying cry for Congress to listen to the American people and tackle this important issue in 2017. We know that tax reform won’t be easy, but it’s essential to ensuring that businesses of all sizes are able to fairly compete in the marketplace.
A key to successfully reforming the federal tax system is putting in place tax fairness between corporate and pass-through business entities. What is a pass-through business? It’s your mom and pop store or the newest startup. It’s businesses that are taxed on a “pass through” basis, meaning the income flows through to the tax returns of the individual owners and is taxed at the individual rate of 39.6 percent, rather than the corporate rate of 35 percent. Counter intuitively, small pass-through businesses are not small; they employ 48.5 percent of the private sector.
They also account for 82 percent of all corporate entities and put $1.6 trillion back into America’s wallet. They’ve done all that while being saddled with a tax rate that’s 4.6 percent higher than C-corps and other corporate entities.
Creating business tax fairness doesn’t require taking from one type of corporate entity to give to another. However, it does mean including the individual tax rate that pass-through businesses pay in any federal tax reform proposal since corporate-only tax reform would exclude more than 80 percent of our nation’s businesses.
When the time comes in 2017, Congress needs to lower effective business tax rates equitably for all businesses, large and small. If they take this important step, federal lawmakers will help ensure that pass-through entities will continue to be our engines of economic growth just as they have since bipartisan tax reforms were first passed by lawmakers in the early 1980s.
What’s clear to us at DDC should hopefully become clear to federal lawmakers and their staff between now and when the 115th Congress convenes in 2017. Eliminating the discrepancy between C-corps and pass-through entities and imposing a consistent tax rate for all businesses is only fair and would unshackle some of the most inventive minds in the country, encouraging America to dream on.