RSM Report Parses Tax Reform’s Implications for the Middle Market

The likelihood that a tax reform bill will come to fruition by the end of the year is increasingly unlikely, according to the most recent volume of RSM US LLP’s “The Real Economy,” whose author expects that tax legislation will be passed in the first half of 2018, if at all.

For the middle market, a key element of the Republican tax framework released on Sept. 27 is the treatment of C corporations and pass-through entities, or businesses whose owners are directly taxed on the company’s income.

“Pass-through income of individual owners would be taxed only once at an overall rate of 25 percent, while C corporation income would be taxed once at 20 percent and a second time at the level of the individual shareholder—typically producing an overall rate of around 36 percent,” writes Joseph Brusuelas, chief economist of RSM, in the report published earlier this month.

According to the Tax Foundation, a nonprofit group that monitors tax policy, more than 90 percent of businesses in the United States are pass-through entities.

RSM estimates that the cost of reducing corporate and individual tax rates would exceed $2 trillion over 10 years, coupled with an increase in annual growth of between 0.2 and 0.6 percent over the period. Much of that growth would be concentrated within three years following the tax reform bill’s passage.

Depending on the accuracy of estimates about the cost of tax reform, another government body could step in.

If the contributions to the budget deficit have been underestimated, “the middle market should anticipate more aggressive monetary policy tightening by the Federal Reserve (Fed) and for interest rates at the longer end of the maturity spectrum to increase,” Brusuelas writes.

Read more of RSM’s analysis of the GOP tax plan in the latest issue of “The Real Economy.”