Big business vs. small business at the edge of 'fiscal cliff'

Washington • Democrats and Republicans aren't the only ones divided over how to fix the nation's fiscal problems. Big business and small business have very different views on whether changes to personal income taxes or corporate taxes should be part of the fix.

Groups that represent American businesses are in a bind. Some of their members declare their business income through their personal income taxes, and they are staring at the possibility of higher tax rates on the top tiers of personal income. Yet big corporations would be unaffected by higher tax rates since they pay corporate income taxes, not personal. They're rooting for a lowering of the corporate tax rate.

Simply put, what's good for some businesses is not necessarily good for others.

"There is no difference, really. They want the same thing — lower rates, certainty, simplification and sound transition rules," insisted Bruce Josten, vice president of the U.S. Chamber of Commerce and the influential group's top lobbyist.

The National Association of Manufacturers takes a similar public tack, preferring for now to avoid talk of competing visions among its members.

"It's hard to talk about a hypothetical," said Dorothy Coleman, vice president of tax policy for the association. "Right now we are very much focused on going to the Hill and spreading our members' concerns."

Manufacturers want Congress to avoid the "fiscal cliff" of expiring tax measures and pending spending cuts, which if left unchanged this month could send the economy skidding downward.

"We're going to lose jobs, we're going to probably go into a double-dip recession, and it's going to set us back about 10 years," Coleman warned.

The most immediate threat for many businesses is allowing the Bush-era tax cuts on personal income to expire at the end of December. President Barack Obama wants to extend them for everyone but the top 2 percent of earners. That might be good for middle-class Americans, but it could hurt many of the roughly 4.5 million business owners who are "S corporations," whose business earnings are declared as personal income on their 1040 tax forms like most people.

The term comes from a 1958 revamp of the tax code adding a subchapter S that created a new category for businesses with specific criteria such as a limited number of shareholders in the company. They're sometimes called pass-through entities because their business income flows to their personal income, where it's taxed at the individual income tax rate rather a corporate rate. Many are much bigger than mom-and-pop businesses.

An even larger number of businesses also are considered pass-through entities, including sole proprietorships, partnerships and limited liability companies, also called LLCs. The most successful ones potentially face tax rates higher than the current 35 percent corporate rate, if the personal income tax rates go up.

In a Nov. 27 letter to congressional leaders from both parties that spells out the competing interests, 42 trade associations whose members mostly declare their business earnings through their personal taxes pleaded for lawmakers to avoid pitting them against corporate interests.

"There is no economic or political justification for reform that lowers marginal tax rates on corporations while raising either marginal or effective tax rates on the 95 percent of businesses structured as pass-through entities," said the trade associations, whose members range from grocers to truckers to general contractors.

Effective tax rates are what individuals or companies pay after all their deductions and credits. The marginal tax rates are what the government progressively takes by tax bracket.

For example, an individual taxpayer pays 15 percent of income from $8,701 to $35,350; 25 percent of income from $35,351 to $85,650; 28 percent of income from $85,651 to $178,650; 33 percent of income from $178,651 to $388,350; and at 35 percent for everything above $388,351.

Obama proposes to raise the top two rates for individual income above $200,000 and family income above $250,000. That would mean higher taxes for an estimated 30 million businesses that pass their business earnings through their personal income taxes.

The president says this protects middle-class Americans. It's a distinction Alan Simpson, the co-chairman of the National Commission on Fiscal Responsibility and Reform, finds puzzling.

"If you tell a guy on the street that nobody under $200,000 or $250,000 is going to be hit because they're the middle class, that guy will laugh you right out of your house. There is an absurdity about this throughout," said Simpson, a former Republican senator from Wyoming.

For big corporations whose shares are traded on the New York Stock Exchange, and who donate heartily to political campaigns, there's ambivalence about the tax plight of smaller firms. They're rooting for a deal that averts the fiscal cliff with a temporary measure that promises a comprehensive overhaul of the tax code next year.

In that event, corporations hope to knock down the current corporate tax rate, higher than in most developed nations, to a rate somewhere around 25 percent or 28 percent. In theory, they'd agree to give up myriad tax loopholes in exchange for a lower rate, but already many are scrambling to try to lock in their existing preferential treatment.

Big banks that underwrite mortgages fear a deal that caps or ends the tax deductions homeowners have enjoyed on mortgage interest. Similarly, equipment manufacturers worry about any deal that slows the ability of their buyers to depreciate assets. And abrupt changes to tax rules could hurt companies that have made long-term investments under the current tax laws.

"You cannot flick a light switch on and off and say. 'Take this,' " said Josten, noting that there are anywhere between $5.5 trillion and $7 trillion in depreciable assets outstanding - everything from fleet vehicles to tractors to office buildings.