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Economics Employment Politics

Why pass-through businesses matter

Wisconsin Sen. Ron Johnson made headlines a few weeks ago when he threatened to vote against the Republican-sponsored tax overhaul.

The Republicans in the Senate needed to take seriously any Republican who said he or she would oppose the bill, because they have a razor-thin majority and could allow no more than two defections.

Johnson brought to the forefront of our national conversation a very important point: the tax treatment of pass-through businesses. Pass through businesses include typically smaller businesses such as S corporations, sole proprietorships, and partnerships. These businesses can be bigger than 500 employees, but most of them are not.

At the risk of sounding overly simplistic, pass-throughs represent Main Street while corporations represent Wall Street.

Overall, there are many more pass-through businesses, but on average they employ fewer people per business than large corporations do.

They can include self-employed individuals, small shops, or locally owned, privately held manufacturers.

Pass-through corporations are so important because they are much more likely to be involved in the lives of their local communities, to treat their employees like family, and to care much more deeply if they ever need to lay off employees. They are much less likely to be able to spend a ton of money on lobbyists or high-dollar attorneys. In short, they have much more “heart and soul” than corporations. They are more likely to have employees who wear multiple hats, and they are much less likely to have tons of bureaucracy.

Some argue that corporations are already taxed higher than pass-through businesses. That may be true (and this is debated in a good Tax Policy article you can go to here), but then again, corporations have tons of advantages, including being able to have their own lobbyists. Corporations are much more likely to be bailed out by taxpayers, like General Motors was bailed out in 2008 and like a good portion of the financial industrial was bailed out in 2009. Also, large corporations are much more likely to be able to afford high-dollar accountants that can help them learn how to find loopholes, offshore accounts, and just basically avoid paying taxes.

Large successful corporations today often started as small-pass through businesses.

Across the country, pass-through businesses employ more people than corporations do.

According to the Tax Foundation, only about 8.1 percent of businesses are corporations.

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It should go without saying that corporations, although fewer in number, will employ on average per unit many more people than pass-through businesses do.

But pass-through businesses still employ more than half of the private sector jobs in the U.S.

According to the Tax Foundation, 57.3 percent of the U.S. private sector workforce was employed or self-employed at a pass-through business.

Pass-throughs also earn more net income than corporations and have grown very rapidly in the past 30 years.

Republicans have said that reducing the corporate tax rate should spur investment, while Democrats have countered that the owners of the corporations will more likely issue stock buy backs and sit on the cash.

In many cases, companies are issuing stock buybacks or raising dividends first before hiring people. But it appears that pass-through businesses are ready to invest.

An additional tax benefit to pass-throughs may boost investment even more than a tax benefit to corporations.

 

 

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