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Why can the large national chain store afford to offer lower prices than the locally owned small business? Taxes are part of the answer. Small businesses pay too much in taxes, and big businesses pay too little. Why should Annie’s Family Restaurant pay a higher share of their revenue than McDonald’s? 

More than 117 million people, representing 56 percent of the American labor force, work for businesses that employ less than 500 people. Small business owners face many challenges when competing with global giants. Major corporations get deeper discounts on everything from merchandise to health insurance for their employees to fees charged on credit card transactions to interest rates on borrowed money. 

Why then should the federal government add to the woes of small business owners by taxing the largest businesses at rates that are in many cases less than half the rate paid by small businesses? Most small businesses are sole proprietorships and, as such, the owners pay taxes at their personal tax rate. A married small business owner whose store made between $56,800 and $114,650 in profits in 2003 would have been taxed at a 25 percent rate. A more successful small businessperson, one whose business generated more than $312,000 in profits, would pay tax at a 35 percent rate. 

In contrast, the federal corporate tax rate is 35 percent, but few large corporations pay anywhere near that amount. Armies of corporate lobbyists, tax attorneys, and accountants have won new laws and mined the existing tax code for clever deductions and tax credits that have dramatically reduced the tax rate of America’s largest businesses. The nation’s corporations were estimated to pay less than15 percent of their net income in federal taxes last year, according to Citizens for Tax Justice, a widely respected non-partisan research organization. 

The American personal income tax is a progressive system that taxes those with the highest incomes at the highest rates. The American corporate tax system has evolved in an opposite direction, whereby smaller neighborhood businesses pay higher tax rates than giant continent-hopping multinationals. When big businesses don’t pay their fair share of taxes, small businesses that remain the economic backbone of our society suffer, putting tens of millions of jobs at risk. 

As federal budget writers struggle with exploding deficits by cutting programs that serve human needs, corporate subsidies continue to grow unabated—more than $125 billion each year—$42 billion more than the federal government spent on education in 2003. These corporate handouts are not going to struggling businesses that need taxpayers’ help to survive, but rather to some of the most profitable and successful businesses in the nation: drug manufacturing, insurance, oil drilling, and commercial real estate to name a few. 

In the 1980s, revelations that dozens of American businesses with billions of dollars in profits were paying no taxes at all drew public anger. In response, President Reagan in 1986 cracked down on corporate tax shelters and reduced corporate subsidies to a fraction of what they had been. A generation later, the problem has reemerged, once again weakening the competitive position of small business and starving the federal budget of much needed revenues. 

Last fall, President Bush called for a reduction in the tax rate paid by small business owners to 32 percent, a small step toward a progressive corporate income tax. The President recognizes, at least in theory, that a lower corporate tax rate on small business would help balance the many other cost advantages available to larger businesses. The problem is that the President failed to address the reality that large companies would still, on average, pay corporate taxes at less than half the rate of small businesses. 

Corporate tax reform, properly done, can reinvigorate America’s small businesses, restore public confidence in the fairness of the tax system, generate much needed revenues to sustain education, housing, health care and other needs upon which business and citizens depend. The largest businesses will have to pay more, but the millions of other businesses in America would end up paying a lot less. 

Scott Klinger is the co-director of Responsible Wealth, a national network of affluent Americans advocating a fairer economy. 

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