The Impact of Tax Expenditure......Policies on Incorporated Small Business
The U.S. Internal Revenue Code contains numerous tax and tax credit provisions affecting the operation and after-tax profitability of large and small businesses. The implementation of these policies and the way in which the effects are distributed between large and small firms has not been well investigated. This study examines the effects of various tax expenditure programs that would allow large and small firms the opportunity to reduce their tax liability. It primarily uses corporate data for 1998 to 2000 Statistics of Income (Sol) Division.
This report identifies ten programs that the Joint Committee on Taxation (JCT) and Treasury classify as tax expenditures to analyze in detail. In addition, while not “true” tax expenditures, the foreign tax credit and deduction for travel and entertainment expenses are also analyzed since they provide businesses with tax benefits. All of these programs account for at least 70 percent of the total tax expenditures provided to corporate taxpayers in the United States over the past few years.
Small firms benefit from certain tax expenditure programs, although as a general matter, by a smaller amount than larger firms. Large firms with more extensive operations are better able to realize advantages from certain tax expenditure programs. The one tax expenditure program that clearly benefits small businesses more than large firms by a sizeable margin is the partial deduction for travel and entertainment expenses. Small firms realized an average reduction of .86 percent in their effective tax rate from this program, compared with large firms that witnessed a .11 percent reduction.
Scope and Methodology
Data collected and maintained by the Treasury and the IRS’ Statistics of Income Division (Sol) permit estimation of effective tax rates, the rate at which taxes are actually paid after credits, deferrals, deductions, and exemptions. Sol provided data tabulations for estimating effective tax rates. They also provided data on several of the specific programs to permit isolation of the impact of these tax expenditure programs on the effective tax rate. These data were provided on the bases of firm size groupings to compute differential effective rates by business size category as well as by general industry category. This enabled researches to quantify the impact of various programs in terms of both the total dollar value of each program as well as the impact on the effective tax rate, and to measure the differential impact between large and small business. Appendix C provides more detail on the effective tax rate methodology used in this study.
The full text of this report and summaries of other studies performed under contract to the U.S. Small Business Administration’s Office of Advocacy are available on the Internet at www.sba.gov/advo/research. Printed copies are available for purchase from:
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