There’s growing interest in Congress in decreasing the corporate tax rate to increase the competitiveness of U.S. businesses strapped with highest tax rate among developed countries. That’s a laudable effort well worth pursuing.
At the same time, though, what can be even higher individual income tax rates for many small business owners hasn’t received similar consideration.
And that’s unfortunate in that it ignores the collectively large role of small firms in this country.
A study conducted by the Tax Foundation, a nonpartisan research organization based in Washington, D.C., details the implications of lowering individual tax rates in the midst of tremendous growth in the number of non-corporate businesses in which income passes through to the owners and is taxed on an individual basis.
According to the Tax Foundation, the number of so-called “pass through” businesses has tripled to more than 30 million over the past three decades even as the number of corporation has declined to 1.6 million. As the income of pass-through businesses has increased five-fold, the income of traditional corporations has only doubled.
While the top federal tax rate on pass-through income is 39.6 percent, business owners also are liable for additional state income and self-employment taxes. The average top marginal tax rate for the 23 million sole proprietorships in the United States is 47.5 percent. The average top rate for the 7.3 million S Corporations is 44.5 percent.
If lawmakers are really interested in improving the competitiveness of U.S. businesses, they should strive to lower not only corporate tax rates, but also the individual income tax rates many small business owners shoulder. Just think what those business owners could do with the savings in terms of expanding operations and payrolls at a time when economic recovery remains painfully slow.