Most businesses don't operate as C corporations. Instead, they operate as sole proprietors, partnerships, LLCs and S corporations. For these entities, the income mostly is taxed at the individual tax rates where the top rate is 39.6% although less than half of one percent of individuals are in that top bracket. According to a recent report from the Joint Committee on Taxation (JCT), for 2016, it is estimated that only 6% of individual returns report income of $200,000 or more. For married taxpayers filing jointly, at $200,000 of taxable income, about $45,000 of that income is taxed at 28%. They would need to have over $233,350 in 2016 to get to a 33% marginal tax rate, over $415,700 to get to a 35% marginal rate and over $470,700 to reach a 39.6% marginal rate. If their income consists of capital gain income, it is taxed at 0% and 15% and doesn't reach 20% until income exceeds $470,700. Basically, very few individuals are at today's top individual rates although many who are have a lot of income.
|JCT, JCX-42-17 (9/15/17)|
Recently, Treasury Secretary Mnuchin stated that accounting firms would not get a lower rate even if the rate is reduced for non-C corp entities. He implied that only firms creating manufacturing jobs would justify a rate cut. (Bloomberg, "Trump Officials Temper Expectation of 15% Corporate Tax Rate," by Mohsin and Sink, 9/12/17.) Wow! The government produces lots of data, but I'm concerned that not many policy makers look at it. According to the Bureau of Labor Statistics, accounting jobs are growing faster than for other industries - at an 11% rate. And these are good paying, interesting jobs that are key to business growth overall. In contrast, jobs for fabricators and assemblers are declining by 1%.
Barry Melancon, President and CEO, has a blog post on Secretary Mnuchin's comments and the justification for lowering all business tax rates as part of reform - check it out. Also see this AICPA testimony for the Senate Finance Committee's hearing of 9/19/17 on business tax reform.
Note: For the rate cut for non-C corporations, the owners must first pay themselves reasonable compensation to be taxed at individual rates + payroll taxes. The remaining income would be taxed at a lower top rate than other individual income though.
What do you think?