WASHINGTON -- Democrats and Republicans aren’t the only ones divided over how to fix the nation’s fiscal problems. Big business and small business have very different views on whether changes to personal income taxes or corporate taxes should be part of the fix.
Groups that represent American businesses are in a bind. Some of their members declare their business income through their personal income taxes, and they are staring at the possibility of higher tax rates on the top tiers of personal income. Yet big corporations would be unaffected by higher tax rates since they pay corporate income taxes, not personal. They’re rooting for a lowering of the corporate tax rate.
Simply put, what’s good for some businesses is not necessarily good for others.
“There is no difference, really. They want the same thing — lower rates, certainty, simplification and sound transition rules,” insisted Bruce Josten, vice president of the U.S. Chamber of Commerce and the influential group’s top lobbyist.
The National Association of Manufacturers takes a similar public tack, preferring for now to avoid talk of competing visions among its members.
“It’s hard to talk about a hypothetical,” said Dorothy Coleman, vice president of tax policy for the association. “Right now we are very much focused on going to the Hill and spreading our members’ concerns.”
Manufacturers want Congress to avoid the so-called fiscal cliff of expiring tax measures and pending spending cuts, which if left unchanged this month could send the economy skidding downward.
“We’re going to lose jobs, we’re going to probably go into a double-dip recession, and it’s going to set us back about 10 years,” Coleman warned.
The most immediate threat for many businesses is allowing the Bush-era tax cuts on personal income to expire at the end of December. President Barack Obama wants to extend them for everyone but the top 2 percent of earners. That might be good for middle-class Americans, but it could hurt many of the roughly 4.5 million business owners who are so-called S corporations, whose business earnings are declared as personal income on their 1040 tax forms like most people.
The term comes from a 1958 revamp of the tax code adding a subchapter S that created a new category for businesses with specific criteria such as a limited number of shareholders in the company. They’re sometimes called pass-through entities because their business income flows to their personal income, where it’s taxed at the individual income tax rate rather than a corporate rate.
An even larger number of businesses also are considered pass-through entities, including sole proprietorships, partnerships and limited liability companies, also called LLCs. The most successful ones potentially face tax rates higher than the current 35 percent corporate rate, if the personal income tax rates go up.
In a Nov. 27 letter to congressional leaders from both parties that spells out the competing interests, 42 trade associations whose members mostly declare their business earnings through their personal taxes pleaded for lawmakers to avoid pitting them against corporate interests.
“There is no economic or political justification for reform that lowers marginal tax rates on corporations while raising either marginal or effective tax rates on the 95 percent of businesses structured as pass-through entities,” said the trade associations, whose members range from grocers to truckers to general contractors.