Today’s hearing on closely held businesses covers a vitally important topic. One of the measures of tax reform should be how well it promotes economic growth and job creation. So-called pass-through businesses represented over a third of business receipts in 2008 and just under half of business income. They are a major part of our economy and a major source of growth and jobs.
Because pass-through entities do not pay corporate income tax at the entity level, and because they range in size from very small businesses to very large businesses, they face a different set of issues with respect to tax reform than do C corporations.
To understand how pass-through businesses will be affected by reform, we have to understand who exactly they are. It used to be that pass-throughs were a reasonable proxy for small businesses. But with the growth in both the number and size of S corporations and especially LLCs, this identity is breaking down.
This is vitally important as we debate the question of whether to continue the upper-income Bush tax cuts. Some have sought to continue draw a straight line between pass-throughs and small business to justify continuing the tax cuts for the highest earners.
But pass-throughs are often quite large. For instance, in 2008, 64 percent of partnership income was earned by partnerships with more than $100 million in assets.
Small business income is also a small fraction of the income that would be affected by an expiration of upper-income tax cuts. Only a small fraction, eight percent, is associated with small business employers.
It also has implications for how this committee approaches the, I think universal or nearly universal, desire to encourage small businesses. We need to keep in mind that if this committee contemplates the repeal of provisions that affect the cash flow of small businesses, such as accelerated depreciation or the domestic manufacturing deduction, in order to finance a corporate rate reduction, it would vitally affect pass-through entities not benefiting from a reduction in the corporate rate. Pass-throughs also would not benefit from some of the international changes that the committee has discussed.
One area where I think most of us agree we can help small business is complexity, and reading through the testimony and the excellent Joint Committee pamphlet, I think there is plenty of complexity for us to explore. I look forward to the testimony.
