Owners of small C corporations should be wary. They would be prime targets to pay more tax if this approach moves forward because they pay the lowest effective tax rate under the current system. To ensure that corporate tax reform is revenue neutral, reformers would likely target deductions and loopholes that many small corporations use.
Few would disagree that our corporate tax system is flawed and should be fixed. Our statutory corporate tax rates have been higher than in every other developed country except Japan and will soon be the highest in the world. At the same time, the amount of taxes corporations actually pay is uneven. Because of a multitude of deductions and loopholes, many companies pay less than the statutory rate. The New York Times reported that 115 companies among the biggest public companies listed on the Standard and Poor's 500-stock index paid federal and other taxes amounting to less than 20 percent of income from 2006 through 2010, while 39 paid under 10 percent.
Experts believe that fixing our corporate tax system would benefit Americans. Eliminating loopholes and deductions in return for lower rates would make it easier for corporations to forecast their taxes. In addition, businesses would become less leveraged because their incentive to take on debt would be reduced. They would also spend less on accountants and lawyers to reduce tax payments and more on productive ways to generate profits. Finally, lowering tax rates would keep many domestic businesses from going overseas while attracting foreign businesses to the U.S.