Published: May 23, 2013
Senators Carl Levin, left, and John McCain facing Tim Cook.
Some of the biggest and most powerful companies in the United States are fighting for a cut in the official corporate tax rate, arguing that it is necessary to allow them to compete more effectively in the global market. But the nation’s millions of small businesses fear they will be the ones paying for it.
“We are in favor of comprehensive tax reform that includes both corporate and personal tax, but we are not happy with anything that raises the rate for us,” said Chris Whitcomb, the tax counsel for the National Federation of Independent Business, the leading small business lobbying and advocacy group, representing about 350,000 members.
The conflict, which in some ways is even larger than the controversial issue of how to properly tax multinational corporations on their global profits, arises because the vast majority of American businesses, including some large, well-known companies and prominent Wall Street firms, actually do not pay corporate taxes at all.
Beginning in earnest in the 1980s, millions of businesses shed their traditional corporate status to become what are known as pass-through companies. That led to a boon for business, but was a drain on the Treasury.
But what began as a typical Washington dispute between big and small business has been transformed into a fierce lobbying battle that pits some of the richest firms in the country against one another. Some big pass-throughs “are trying to conflate themselves with smaller pass-throughs,” said one official working on tax reform in Washington — so much so that they could be accused of “small business identity theft.”
Business executives have long complained that a traditional corporation’s profits are taxed twice, first at the corporate level, and then again on the dividends received by shareholders. Pass-throughs, by contrast, are allowed to distribute their profits directly to their owners and investors, who then pay federal taxes on their personal income tax schedule.
This arrangement, previously used almost exclusively by partnerships, very small businesses and the self-employed, proved especially attractive after the major 1986 tax overhaul, which cut personal rates below corporate ones. That spurred a vast migration to pass-through status, a shift that has continued up to the present day.