Corporate Tax Debate Ignores Mid-Sized Businesses

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Peter Fricke Contributor
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Congress seems poised to lower the corporate tax rate, but lawmakers have so far largely ignored the mid-sized businesses that are actually the main drivers of job creation.

Joe Adams, CEO of the consulting firm McGladrey LLP, told The Daily Caller News Foundation on Monday that while efforts to ensure that reduced corporate rates do not exclude small businesses are commendable, similar protections are also needed for the middle market, generally defined as companies with annual revenues between $10 million and $1 billion.

“While the current bipartisan agreement over the need to lower the corporate tax rate is a refreshing and welcome change to the tax policy dialogue in Washington,” Adams said. “It reflects an obsolete ‘big or small’ view of business that ignores America’s most prolific job creators – the middle market.”

According to research by McGladrey Chief Economist Joe Brusuelas, “mid-sized businesses were responsible for 68 percent of all new jobs created in 2014, and … are poised to accelerate that number in 2015.” (RELATED: Analysis: Are US Corporate Tax Rates Really the Highest in the World?)

Mid-sized businesses also served as “our economy’s secret weapon” during the recent recession, Adams claimed, over the course of which they “added more than two million jobs, while their large counterparts cut four million positions.”

Yet, “mid-sized businesses are rarely, if ever, considered in policy debates,” he said, including the current debate over corporate tax reform. (RELATED: Tax Reform is Good Policy and Good Politics for the GOP)

“The vast majority of middle market firms, like small businesses, are organized as pass-through entities (and thus have their earnings taxed through the individual filings of their owners and partners),” Adams explained. As a result, simply reducing the corporate tax rate would primarily benefit large corporations and not the small- and medium-sized businesses that together account for a much greater share of employment and GDP.

As part of the “fiscal cliff” deal (the American Taxpayer Relief Act of 2012), Congress sought to address that loophole by introducing a new top individual tax bracket of $450,000, which was designed to shield small-business owners from increased taxes on the highest-earners.

“While the majority of owners and partners at the nation’s smallest businesses likely fall below that threshold,” Adams told The DCNF. “Middle market filers are far more likely to fall above it.”

In a 2014 survey of more than 500 middle market executives, McGladrey found that recent tax changes, including the fiscal cliff deal and Obamacare, “were leading many companies to slow down or cut back in key areas,” including nearly every company organized as a pass-through entity. (RELATED: Obama Says His Corporate Tax Plan is Based on GOP Ideas)

In addition, most managers who cut their workforces in 2013 “attributed those cutback decisions, at least in part, to tax increases they’ve seen as part of the fiscal cliff deal,” which Adams considers “compelling evidence that the law’s protective threshold was too low to shield middle market businesses.”

Although current efforts to reform the corporate tax code do not seem likely to include hikes to the individual tax rate, Adams said, even “the much-discussed ‘corporate only’ approach to reform that simply lowers the corporate tax rate” could end up shifting more of the corporate tax burden onto the shoulders of mid-sized businesses.

“While the specific outlines of any future tax reform effort have yet to be ironed out,” he explained, it is generally expected that Congress will offset reductions in the corporate tax rate by phasing out various business tax breaks that apply to companies of all sizes. (RELATED: Cost of Corporate Tax Breaks Explodes in Oklahoma)

A better solution, Adams told TheDCNF, would be a proposal advanced by McGladrey’s Washington National Tax Leader Dave Kautter to create “a separate business rate tax schedule that would apply to ALL businesses,” rather than taxing businesses at different rates based on whether they file through the corporate or individual tax code.

“Business income from pass-through entities is already required to appear on separate schedules to IRS Form1040,” he pointed out, so “the process would not add significant complexity to the tax system,” but would create parity in the way different-sized businesses are taxed “without altering the progressive rate structure that exists for conventional personal income.”

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Peter Fricke