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Pass-through groups push back against corporate-only reform

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Senate Finance Committee Chair Orrin Hatch, R-Utah, and House Ways and Means Committee Chair Paul Ryan, R-Wis., continued to advance the idea of corporate-only tax reform last week, but received resistance from groups representing pass-throughs.

For several weeks, Ryan and Hatch appeared to be abandoning efforts to pass a comprehensive tax reform bill that would lower both corporate and individual rates. The growing momentum for corporate-only reform has threatened many pass-throughs, whose business income is ultimately paid on individual returns. Hatch and Ryan made their position even more clear last week, asking the members of the Coalition for Fair Effective Tax Rates to identify proposals they would accept in lieu of a rate cut as part of tax reform.

In a letter to the coalition, Hatch and Ryan conceded that they cannot lower individual rates as part of comprehensive tax reform as long as President Obama is in the White House. Instead they are working on a business tax reform plan that would cut only the corporate rate, leaving unchanged the rates on pass-through business income. Hatch and Ryan asked coalition members for ways to lower the effective rates of pass-throughs without actually including them in a corporate rate cut.

More than 100 influential trade groups, including the S Corporation Association and the National Federation of Independent Business, immediately responded with a letter essentially rejecting the overture. The Coalition for Fair Effective Tax Rates has been one of the more vocal groups demanding that business reform include both corporate and individual rate cuts, and many of its members signed the letter. They wrote that Congress “needs to reduce the tax rates paid by individuals and corporations.” The letter argues that splitting business income and taxing it at different rates would curb economic growth and cause inefficient tax planning; and the coalition declined to offer any ideas for lowering effective rates without a direct rate cut.

Grant Thornton has long been a strong supporter of tax reform that equitably lowers rates for pass-throughs and C corporations. If tax reform cannot include an individual rate cut, a business equivalency rate could ensure that active business income from a pass-through is taxed at a rate no higher than the top corporate rate. See our business equivalency rate webpage for more information.

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