What NFIB’s study on effective tax rates really tells us about small business priorities for tax reform

Study shows the need for tax reform to require large corporations pay their fair share of taxes

On August 7th, the NFIB and the S Corporation Association released a study examining the differences in effective tax rates paid by different kinds of business entities.  In releasing the study, NFIB’s CEO Dan Danner noted that the study “confirms small businesses currently pay a higher effective tax rate than many large corporations.” 

But, the data in NFIB’s study tells a story that runs much deeper than that headline.  Main Street Alliance analysis of NFIB’s data clearly leads to the conclusion that the goal of tax reform must be to correct unfairness in the U.S. tax code by requiring large corporations to pay their fair share. 

Here are key takeaways.

For businesses organized as pass-through entities, the tax code is progressive.  NFIB’s study shows that  effective tax rates for owners of pass-through business entities (including sole proprietorships, partnerships, and S-Corps, which don’t pay corporate income taxes and instead “pass through” their net income to owners’ individual tax returns) are largely meeting the goal of progressivity – the wealthier the business owner, the higher the effective tax rate. * 

Tax Rates for Pass-Through businesses

However, inequities in the tax code allow the largest corporations to pay unfairly low effective tax rates.  While effective tax rates for pass-through businesses are largely progressive, effective tax rates actually decline for the largest corporations organized as C-Corps.  For C-Corps with net assets under $25 million, effective tax rates do meet the progressivity test, with effective rates increasing as the size of the business increases.  After that, the corporate tax code becomes extremely regressive – the bigger the corporation, the lower its effective tax rate, with the largest corporations (net assets greater than $2.5 billion) paying a bargain 15.5% rate – less than half the statutory corporate tax rate of 35%.  This regressive corporate tax structure, where large corporations pay unfairly low rates, benefits a small minority of businesses – around 4% of businesses organized as C-Corps. 

Tax Rates for C-CorpsPercent of C-Corps

Analyzing the NFIB study, there’s no escaping the conclusion that the goal of corporate tax reform should be requiring large corporations to pay their fair share of taxes, not lowering corporate tax rates.    As President Obama and Congress take up corporate tax reform, they should close tax loopholes that rig the tax code to the benefit of large corporations, including ending offshore tax dodging.  Main Street Alliance polling shows that small business owners across the political spectrum support reforms to require corporations pay their fair share. 

*Side note: The NFIB may have released this study with the hopes of presenting a compelling case for tax reform to lower tax rates for the wealthiest individual taxpayers with pass-through business income.  That’s not surprising, given its opposition to the “fiscal cliff” deal that raised top rates on the wealthiest 1% of taxpayers.  So, it’s interesting to note that, by the NFIB’s own numbers, business owners in the top income brackets (net personal income above $200,000) represent just 3% of all taxpayers with positive net income from a pass-through business.  As we’ve noted before, that 3% figure includes corporate law practices, hedge fund managers, and high-powered K Street lobbying firms – not exactly the true small business owners who fuel the Main Street economy. And, for that matter, not the typical NFIB member who, according to its “Who NFIB Represents” page, “employs 10 people and reports gross sales of about $500,000 a year” (gross sales of $500,000 a year would produce a net income below $200,000 at any profit margin below 40%).

Percent of Pass-Through

 

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