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S-Corporations Pay Highest Effective Tax Rates

Aug 12th 2013
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By Jason Bramwell

A study released by the National Federation of Independent Business (NFIB) and the S-Corporation Association on August 7 shows that S-corporations pay the highest effective tax rates of any type of business.

The study, authored by Quantria Strategies LLC, compares the tax burden different business entities will shoulder in 2013. Results show that S-corporations will pay the highest average effective tax rate (31.6 percent), followed by small business partnerships (29.4 percent), C-corporations (17.8 percent), and sole proprietorships (15.1 percent).

NFIB President and CEO Dan Danner said in a written statement that the study delivers a strong counter-argument to President Obama's proposal for a "grand bargain for middle-class jobs", which the President announced during a speech in Chattanooga, Tennessee, on July 30. President Obama said he would work with Republicans to reform the corporate tax code and use the money from closing tax loopholes to fund projects aimed at creating jobs.

"The US tax code is unfair and complex", Danner said. "[The] study provides valuable data that confirms small businesses currently pay a higher effective tax rate than many large corporations. [More than] 75 percent of all small businesses in the United States are taxed at the individual rate – signifying the need for comprehensive reform that addresses both individual and corporate taxes. The NFIB will continue to advocate for a level playing field so that small business owners can create jobs and grow their business."

The results of the study come at a critical time for tax reform. Ways and Means Committee Chairman Dave Camp (R-MI) and Senate Finance Committee Chairman Max Baucus (D-MT) intend to spend much of August crafting their respective tax reform plans, according to the S-Corporation Association. 

The two lawmakers are traveling the country to hear from constituents on how to spark the economy and make the tax code fairer for families and job creators. Camp and Baucus have planned stops at two separate technology companies in San Francisco and the Silicon Valley area on August 19 and 20.

"America's tax code is inefficient, outdated, and overly complex. It is stifling innovation and holding back America's economic growth", Camp and Baucus said in a joint statement. "We have a chance to fix the broken code so more jobs are created and paychecks get bigger. It is a challenge we are ready to take on. Tax reform can fuel new research and development. It can boost the economy, create jobs, and make US businesses more competitive at home and in the global marketplace. Most of all, it can provide a real shot in the arm that America needs in a struggling economy."

According to the study, while many people think of the statutory tax rate when they consider the effect of federal income taxes, the reality is that the statutory tax rate does not represent the best measure of the effect of taxes on a business.

"Average effective tax rates are a better measure of whether a particular industry or business form faces greater or lesser federal income taxes relative to other industries or business forms", the survey states.

According to the study, S-corporations making more than $200,000 will pay an effective tax rate of 35 percent, which is equal to the marginal tax rate paid by the most successful C-corporations.

Moreover, the study shows the S-corporation tax burden is highly progressive, with the smallest S-corporations paying 19 percent in tax, while the largest pay 35 percent.

In a separate Small Business Administration study authored by Quantria Strategies in 2009, S-corporations were found to have the highest average effective tax rate (26.9 percent) of any entity type with gross receipts of less than $10 million, followed by small business partnerships (23.6 percent), C-corporations (17.5), and sole proprietorships (13.3 percent). 

"Comprehensive tax reform is the only way to ensure we make the tax code more fair and equitable for all employers", Congressman Dave Reichert (R-WA) said in a written statement. "We know Main Street businesses employ most of the workers, and this study shows they pay lots of taxes, too. The President's plan to raise their taxes further in order to cut tax rates for big business is simply a nonstarter. Tax reform needs to be comprehensive, and it needs to level out the tax burden paid by businesses of all types."

About the survey:

Quantria Strategies' proprietary individual income tax microsimulation model is the primary tool used to calculate effective tax rates. The model uses the 2010 public use file (PUF) as its principal data source with supplemental data provided by the 2010 Corporate Source Book

For noncorporate businesses and S-corporations, the model calculates total federal income tax liability for each tax return in the PUF sample based on a detailed specification of the tax law in place for 2013. The microsimulation model aggregates the results for each individual tax record to arrive at national totals. This specification of the tax law includes all the adjustments, exemptions, exclusions, tax credits, and income phase-outs that are part of calculating total federal income tax liability. 

After extensive testing and validation, the tax calculations in the model reproduce actual tax liabilities reported by US taxpayers for the tax year 2013 to within approximately 1 percent. 

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Replies (2)

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By Scott Leighton
Jun 25th 2015 20:11 EDT

C Corps are taxed twice, once on the corp income and the SH's get taxed again on the dividends. Comparing the C Corps tax rate to an S Corps is apples and oranges. Very misleading.

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By Roger Lee
Jun 25th 2015 20:11 EDT

Once again the politicians (in this case, Camp & Baucus) miss the point completely. The purpose of the federal income tax is to generate income for the federal government. Period, end of subject. The reason the tax code is so complicated and inefficient is that it has been used over the years in attempts to encourage or discourage certain types of economic behavior. Creating new jobs, fueling new research, boosting the economy and making businesses more competitive are worthy goals indeed. But until we figure out that the tax code is the wrong tool to use for those jobs, true tax reform and simplification of the code can never happen.

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