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Tax reform won't help most businesses

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Damian Dovarganes / AP / File

(Read caption) Owner Patrick Guilfoyle, peeks out of his new Phydough Truck, a street food truck that sells gourmet dog treats: ice cream and cookies specially made for dogs, downtown Los Angeles on Friday, Jan. 7, 2011. Would small businesses like Guilfoyle's benefit from corporate tax reform?

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To the Obama Administration, tax reform means corporate tax restructuring. Both the president and Treasury Secretary Tim Geithner have argued that at least the first tranche of reform would scale back tax preferences, cut corporate rates, and, in all, raise the same money that the tax code does today. In Obama’s vision, redesign of the individual tax system would wait for another day.

But there is a problem with this scheme: It appears that while all businesses would lose some tax preferences, the rate cuts would apply only to corporations. Thus, non-corporate businesses would end up paying higher taxes. In effect, firms such as partnerships, sole proprietorships, and LLCs—about 90 percent of U.S. businesses—would subsidize the rate cuts for a handful of corporations. The House Ways & Means Subcommittee on Select Revenue Measures held an interesting hearing on all this yesterday featuring, among others, Tax Policy Center director Donald Marron.

As a matter of policy, treating corporate and non-corporate businesses more equally is an excellent idea. But Obama’s approach leaves much to be desired. And as politics, this arrangement will be exceedingly dicey. The inevitable headline will be “Small Businesses Pay for Multinationals’ Tax Cut.” This headline will be wrong, but effective.

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