Corporate Tax

Biden corporate tax proposals might have an effect on small companies

While the Biden government’s intent may be to target top-tier businesses and high-income earners with its new corporate tax proposals, unwise policies could affect many small businesses, considering that the COVID-19 pandemic has already caused disproportionate damage.

Contrary to what some people think of companies, not all of them are necessarily great employers. New Census data from the County Business Patterns Survey for 2019 shows that 99.4 percent of C companies have fewer than 500 employees, the Census definition of a small business. These small C-corps would also be subject to the Biden government’s proposed increase in the corporate tax rate to 28 percent, not just the largest corporations.

Although most small businesses are legally structured as transit companies and are therefore subject to individual income tax rather than corporate tax, almost a quarter are structured as C companies. Some industries have a larger corporate small business sector than others and would be disproportionately affected by Biden’s corporate tax proposals. Industries in which more than a quarter of its small businesses are structured as C-companies include mining, utilities, manufacturing, wholesale and retail, transportation, information, finance, and corporate management.

Many of these smaller businesses could grow larger over time with increasing success, but would be hurt by a higher corporate tax rate. Recent research shows that corporate taxation distorts the “life cycle” of companies. A higher corporation tax would make it more difficult for these companies to fund their investments with retained earnings, as they reduce after-tax income and grow more slowly. The start-up rates as a whole, which have been falling since the 1980s, could also be affected. Research has shown that almost a fifth of this drop in birth rates could be explained by the high US corporate tax rate prior to the 2017 tax reform.

Policy makers should recognize that corporate tax increases will not only affect large companies, but many smaller and younger companies as well. Given that many of these smaller firms are significant contributors to net employment growth, raising corporate taxes at present would not be conducive to rapid economic recovery.

Launch Resource Center: President Biden’s Tax Proposals

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