New Chairman of the House Committee on Ways and Means Paul Ryan (R-WI) held the first hearing of the 114th Congress on January 13, 2015. The hearing’s focus was on the state of the U.S. economy and policies that can promote job creation and economic growth. During the hearing key members kept raising the question of how to best treat pass-through businesses in tax reform:
Dave Reichert (R-WA) (1:53:00):” In another area where we have the ability to boost our economy – through tax reform, as has been mentioned, and which would benefit businesses large and small — what about pass-through businesses…which face a high marginal tax rate in addition to high compliance costs. How do you see the change in the tax code specifically helping those small pass-through businesses?”
Economist Martin Feldstein who was an invited witness commented: “I think that’s a major challenge that you face as a committee and in Congress in dealing with tax reform. That lowering the corporate tax rate, where both the President and Republicans have said ‘we’ve got to get down into the twenties,’ will still leave pass-through businesses, who file through their personal tax returns, facing much higher tax rates, so somehow that has to be dealt with. And by treating the business income of individuals differently from other things, so that in effect they get the advantages of the lower tax rate that come with corporate tax reform.”
Rep. Vern Buchanan (R-FL) (2:22:00): “I want to bring up something my colleagues mentioned earlier, about corporate rates being the highest in the world…I think we agree that we need to do something with corporate rates. My concern is pass-through entities. You touched a little bit on effective rate, and how when you add everything the effective rate is 40 percent or more, and if you add in state income tax, the average is 49.6. So if you look to move corporate rates from 35 to 28 to 25, whatever they’re thinking about doing there, I don’t know how you can be competitive in terms of pass throughs. One statistic I got is 99 percent of the companies registered in Florida and other places are small businesses, obviously a lot of them pass throughs. And 60 percent of job creation comes from these businesses, and many of these start-ups. In terms of reducing the rate, if you’re a pass-through company and you have seventy employees, and you’re giving half your money back to the various governments, it’s pretty hard to be able to grow your business, add equipment, add jobs, when you’re giving half of [your money] away. My point, to the professors here today, is to ask what effect lowering the rates on C corps and pass throughs would have on the economy and on creating jobs….”
Economist Doug Holtz-Eakin who was invited to provide testimony: “It’s bad tax policy to treat business income differently depending on whether it’s a pass through or a C corporation. And that would drive you to organize your business based on tax considerations rather than business considerations; that’s the hallmark of the tax system interfering with the economy.”
Representative Todd Young (R-IN) (3:00): ” I’d like to talk about tax reform…but specifically focusing on tax reform for our smaller businesses and younger firms. I do have some concerns, going back to the small and younger firms that, about some intimation by the President and by others in this town that we may only consider corporate reform, rather than the individual code so that those pass-through entities like S corporations and LLCs get the benefit of simplification, on one hand, and rate reduction, knowing that many of them pay over half of their profits in taxes, when you combine the taxes at different levels of government. It bears reminding that, over the past decade, more than six out of every ten new jobs created in this country have been through these smaller firms, and this is where over half of jobs currently exist in this country.”
