Up until now the main focus driving the discussion on the for tax reform has centered around the dubious distinction of America’s number top ranking as the nation with the world’s highest corporate tax rate – and for good reason, as that “distinction” is a significant hurdle in our bid to be continually competitive in a worldwide race for investment. However, every so often the topic turns to one of the biggest challenges for policymakers in the discussion of tax reform – flow-through or pass-through businesses, (ie. companies that are organized in a way that the tax burden flows through to the business owners’ individual tax returns). Tomorrow, the Senate Finance Committee will take this issue head on in a hearing appropriately entitled, “Tax Reform: Examining the Taxation of Business Entities”.
According to IRS data the number of flow-through businesses more than tripled from 1980 to 2008 totaling nearly 31 million today. How to treat these businesses in the context of tax reform is especially critical to manufacturers as nearly two-thirds of manufacturers are organized as a flow-through business. For these companies it’s essential that any tax reform plan include permanent lower individual marginal rates.
Most of the focus lately on the topic of individual marginal rates has centered on what to do with the soon expiring 2001 and 2003 rate cuts for the top two brackets. To the NAM there should be no debate here – all of the 2001 and 2003 tax relief should be extended for at least a year to provide time for Congress to finally turn to, and complete, comprehensive tax reform. The discussion about individual marginal rates is also particularly relevant for the NAM in the debate about tax reform because IRS data tells us that in 2008 the average net taxable income for these small and medium sized manufacturers (SMMs) is $384,000 so maintaining competitive marginal tax rates for all brackets is key if we want these SMMs to continue to compete and be successful.
While some may view this as a hefty sum – one which underscores the argument that those in the top brackets should face increased taxes so that they pay more of “their fair share”, it actually represents the opposite truth. In fact, raising taxes on these very business owners will reduce their ability to reinvest in their companies, to hire more, to expand or improve their products and to continue to survive in an ever changing and global marketplace.
The bottom line is that just as for their larger corporate counterparts, for SMMs the rate matters. As the Senate Finance Committee kicks off their hearing tomorrow we sure hope they are paying attention to the need take care of those 31 million job creators who will be closely monitoring the discussion.