Small businesses organized as S corporations pay the highest effective tax rates of any type of businesses in the U.S.
Both of these organizations are part of the Coalition for Fair Effective Tax Rates, which wants Congress to approach tax reform with the goal of treating all businesses similarly, whether they pay corporate taxes or whether their income passes through to their individual owners for tax purposes.
The key to this is looking at effective tax rates — the percentage of income that businesses actually pay to the government after various tax breaks are used — not just statutory tax rates, the coalition argues.
That’s where the new study comes in. It found that America’s 3.9 million S corporations pay an effective federal income tax rate of 31.6 percent. The profits of S corporations pass through to their individual shareholders for tax purposes.
C corporations, by contrast, are subject to the corporate income tax. Although the top corporate tax rate is 35 percent — the highest in the developed world — the effective tax rate for America’s 814,837 C corporations is only 17.8 percent, according to the study.
The effective tax rate for America’s 2.8 million partnerships is 29.4 percent, while the nation’s 22 million sole proprietorships — the smallest of America’s small businesses — pay an effective tax rate of 15.1 percent, according to the study.
Brian Reardon, executive director of the S Corporation Association, said the study shows that pass-through businesses are “paying at least their fair share of taxes, if not more than their fair share of taxes.”
The high effective tax rates paid by S corporations “are driving capital from these businesses, and making them less likely to go out and hire and invest,” he said.
NFIB President and CEO Dan Danner said the new study “confirms small businesses currently pay a higher effective tax rate than many large corporations. This study delivers a strong counter argument to the president’s announcement last week that corporate-only tax reform is the best path.”