At a House Ways and Means Committee hearing on March 7, witnesses discussed the White House proposal to increase the top income tax rate to 39.6%. Because many owners of small businesses pay tax at higher individual rates, the question centered on the impact of the higher tax rate on job creation.

Ways and Means Chair Dave Camp (R-MI) opened the discussion by noting that it is important to create a tax code that does not tilt "too much in any one direction." If the tax code for small businesses favors large corporations over limited liability companies and other flow-through entities, it will cause unfavorable results. Camp suggested that the best policy is "to create a neutral tax code in which the individual tax rates are similar to the corporate rates."

Previously, Camp and other Republicans introduced legislation that proposes a top rate of 25% for both individuals and corporations. This proposed reduction in the top rates will require elimination of many business and itemized deductions.

Camp referred to a study by the Congressional Joint Committee on Taxation. It indicated that 56% of business income and 54% of small business jobs were found in small business partnerships, subchapter S corporations and limited liability companies. These are all called "pass-through entities."

The White House has proposed increasing the individual rate to 39.6% and reducing the top corporate rate to 28%. The proposed reduction in the top corporate rate is an effort to boost employment. At present, the U.S. is the country with the highest corporate rate among first-world nations.

Camp objected to the White House plan to have a personal rate of nearly 40% and a corporate rate of 28%. He suggested that a 12 percentage point difference in the two rates "will create more harm than good."

Ranking Ways and Means Member Sander Levin (D-MI) agreed that a good tax plan should "promote economic growth and job creation." He also stated that the pass-through entities account for approximately half of business income and provide half of business jobs.

Levin explained that the basic question is "whether to continue the upper-income Bush tax cuts." In his view, only 8% of the expected increase in revenue from the higher personal tax rate would be from "small business employers."

Levin continued with the suggestion that most of the partnership income comes from very substantial partnerships. At least 64% of total partnership income is earned by partnerships with over $100 million in assets.

Finally, Levin agreed that there is a major problem with complexity of taxes for small businesses. He hopes a future major tax reform bill can resolve the issue of tax complexity.