Study Finds Individual Tax Rates Have Strong Impact on Business Activity

A study completed by the Tax Foundation found that, with pass-through businesses surpassing traditional corporations in number, individual tax rates with higher burdens impact hiring and other investment plans, causing an already struggling economy to remain unstable.

In fact, 80 percent of the construction industry is comprised of pass-through entities and the construction industry pays the highest effective tax rate in the country. Those high rates have negative consequences for both businesses and the overall economy.

An Aug. 7 study released by National Federation of Independent Business and the S Corporation Association, of which ABC is a coalition member, included analysis by Quantria Strategies showing that S corps will pay the highest effective tax rate in 2013 at 31.6 percent, compared to 29.4 percent for partnerships, 17.8 percent for C-corporations and 15.1 percent for sole proprietorships.  Effective tax rates are the percentage of income businesses pay in taxes.

To address this issue, ABC July 23 became a founding member of the Coalition for Fair Effective Tax Rates, which supports using effective tax rates as the clearest way to judge the impact of tax reform on businesses. 

These studies come only months after the White House unveiled a proposal July 30 by President Barack Obama in Chattanooga, Tenn., that includes the same corporate tax cuts proposed last year paired with new stimulus spending for infrastructure and manufacturing paid for with one-time tax revenue, but no meaningful reform for S corps.

“Corporate-only rate reduction does not amount to business tax reform,” said ABC Vice President of Federal Affairs Geoff Burr. “The president’s plan not only widens the existing gap between Main Street and the Fortune 500, but would actually mean billions of dollars in increased taxes for construction contractors.”

In 2010, the net income of pass-through businesses made up 54 percent of all net business income. The article showed that between 1980 and 2010, the total number of pass-through businesses nearly tripled from roughly 10.9 million to 30.3 million, over time generating more stable net business than C corporations. 

Income of Pass-Through Businesses Increased Five-fold while Income of Corporations Doubled

The Tax Foundation explains the importance of looking at the amount of overall business income that is taxed at the highest rate, citing 2007 Treasury data that indicated 50 percent of all pass-through income is earned by taxpayers subject to the top two tax brackets that year of 33 and 35 percent.

Combining the federal tax rates, state and city income taxes and self-employment taxes, pass-through businesses face top marginal tax rates on average between 44.5 and 47.5 percent.