The Impact of Tax Reform on Middle Market Business
In the National Center for the Middle Market's latest middle market survey, 63 percent of the respondents said that corporate tax issues were highly or somewhat challenging. It's easy to see why tax reform is crucial to the middle market's fortunes.
The U.S. has the highest corporate tax rate in the developed world: 35 percent. When state corporate taxes are included, that number increases to 39.1 percent. In a global economy, U.S. tax rates affect U.S. competitiveness because many of the 200,000 U.S. middle market companies compete against rivals based in countries where the corporate rate is much lower, such as Germany (15%), Ireland (12.5%), Japan (25.5%), Canada (15%), and China (25%).
President Obama and Republicans have both proposed lowering the corporate rate, eliminating many of the current tax breaks and simplifying the process. It's a tall order, but the economic benefits for middle market companies from a fairer and simpler tax system would be enormous.
The president's proposed 28 percent corporate rate would still be higher than our major competitors. House Ways and Means Committee Chairman Dave Camp (R-MI) recently introduced a comprehensive tax reform plan that would reduce the corporate rate to 25 percent. It's difficult, however, to make an accurate assessment about which proposal is better because that depends on how many current tax breaks would be eliminated. Many companies pay a much lower effective rate because of those existing breaks, so some companies could end up paying more taxes on the same revenue after reform.
Even so, one of the comments I hear most from company executives is that they would trade their various breaks for a low, fair corporate tax system. That's in part because the current system is complicated. The U.S. Taxpayer Advocate, which operates out of the IRS, estimates that tax compliance for all taxpayers (corporate and individual) takes 6.1 billion hours, or the equivalent of 3 million workers. Just imagine what it would do for economic growth if middle market companies could redirect most or all of the money and manpower they devote to tax compliance and use it to invest in and create jobs.
In addition, tax reform would remove some of the uncertainty that has plagued the economy since the recession — with 82 percent of middle market companies claiming uncertainty about how government actions will affect their business as a top concern. When employers can't plan for the future because current tax provisions were extended for only a few months or a year and may not be renewed, they are understandably cautious about investing and hiring.
Most middle market companies don't have the resources to hire a team of lobbyists to push for special breaks and treatment under the tax code. Nor do they want to hire a team of CPAs to ensure they are complying with the code while legally minimizing their tax obligations. In the current middle market survey, 83 percent say their ability to maintain margins and 86 percent say the cost of doing business are real challenges. Hiring lobbyists and CPAs only make those challenges greater.
Passing comprehensive tax reform probably won't happen this year. But it could, and should, happen next year. If Congress and the White House are serious about jumpstarting the sluggish economy, few efforts would be more beneficial for middle market businesses than passing tax reform that significantly lowers the corporate rate and simplifies the system.
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Merrill Matthews is an NCMM contributor and a resident scholar at the Institute for Policy Innovation in Dallas, Texas. Follow him on Twitter and circle him on Google+.