November 11, 2021
Mark Twain is reported to have said, “No man’s life, liberty, or property are safe while the legislature is in session.” I believe this particular Congress is proving him right.
As I’m writing this, the House and Senate are dithering on the “infrastructure” package and how to pay for it. Hence, when you read this column, whatever form the legislation takes will be long known and still, I imagine, little understood.
One thing we can understand is that the House tax package, sponsored by Rep. Richard Neal (D-Massachusetts), would hit private companies twice as hard as public C corporations. This is not my opinion but rather the conclusion of the S-Corp Association and a new study from EY on the effects of the legislation. According to EY, the tax bill proposed in the House of Representatives “would impose marginal rates of 46.4% or more on private companies, while taxing public corporations as little as 26.5%. No business structure can survive such a competitive imbalance, so the net effect would be to encourage further economic consolidation away from Main Street and toward Wall Street.”
In my view, EY’s conclusion is important because 77% of all private-sector jobs nationally are in privately held companies, many of them pass-through entities, while the remaining 23% are in public companies. The Neal bill, with its anticipated tax increases, threatens our viable small business job sources. Here are specific examples:
- The bill authored by Congressman Neal would 1) increase the top rate on pass-through entities, 2) apply the 3.8% net investment income tax to all their profits, and 3) impose a new 3% surtax on their income. EY says that adds up to 46.4%, or 17 percentage points more than they pay now.
- For private C corporations, the corporate rate increases to 26.5%, while the top rate on capital gains and dividends increases to 31.8%.
- The rate on public C corporations would rise to just 26.5%, and although the rate on capital gains and dividends increases, too, most public company shareholders don’t pay taxes or pay sharply reduced rates. The result is that the second layer of tax is deeply discounted if it’s paid at all. EY estimated the second layer for public companies was about 8 percentage points, so the combined rate for public C corporations is somewhere in the mid-30s, or about 12 percentage points less that the private company rate.
Of course, since our public policy debate is all about narratives these days, you won’t be surprised that this bill is being marketed as making the rich billionaires and multinational corporations “pay their fair share.” A tax rate of 46% for private companies and a rate of 26.5% for public companies is not fair share.
So as Congress debates this tax bill, let those of us who own small businesses brace ourselves for the worst. Congressman Neal’s bill will hurt us and our employees.
Eric Elgin is owner of Oklahoma Interpak and Chair of AICC’s Government Affairs subcommittee. He can be reached at 918-687-1681 or eric@okinterpak.com.
