The House tax package would hit privately held companies twice as hard as publicly traded C corporations. It would impose marginal rates of 46.4% or more on the former, while taxing the latter as little as 26.5%. No business structure can survive such an imbalance, so the net effect would be to encourage further economic consolidation away from Main Street and toward Wall Street.

Why should policy makers care? Because private companies are where the jobs are. A new study from EY demonstrates that private companies supply the...

House Ways and Means Committee Chairman Richard Neal presides over a markup hearing for the Build Back Better Act in Washington, Sept. 9.

Photo: J. Scott Applewhite/Associated Press

The House tax package would hit privately held companies twice as hard as publicly traded C corporations. It would impose marginal rates of 46.4% or more on the former, while taxing the latter as little as 26.5%. No business structure can survive such an imbalance, so the net effect would be to encourage further economic consolidation away from Main Street and toward Wall Street.

Why should policy makers care? Because private companies are where the jobs are. A new study from EY demonstrates that private companies supply the vast majority of business-sector jobs nationally—77% of them. Public companies supply only 23%. As important, private-company employment is spread evenly across the country while public-company jobs tend to be concentrated in a few cities and states. The Democratic bill would accelerate the decline of less-prosperous regions.

So why is a bill marketed as making billionaires and multinational C corporations “pay their fair share” targeting family businesses instead? Here’s the breakdown:

• Pass-throughs. The bill, authored by Ways and Means Chairman Richard Neal, would increase private companies’ top rate; apply the 3.8% net investment income tax to all their profits; cap the 20% pass-through deduction that helps family businesses compete with the 21% corporate rate; and impose a new 3% surtax on their incomes. That adds up to 46.4%, 17 points more than they pay now. Mr. Neal claims only companies making millions would pay this rate. But for family businesses, the 46.4% rate would kick in at income as low as $500,000.

• Private C corporations. Their corporate rate would increase to 26.5%, while the top rate on capital gains and dividends would rise to 31.8%. Since most shareholders pay taxes on dividends and gains, the combined rate would be 49.9%, higher than for a pass-through. People ask us why they can’t just convert, and this is the reason.

• Public C corporations. Their rate would rise only to 26.5%, and while the rate on capital gains and dividends increases too, most public-company shareholders don’t pay taxes, or pay sharply reduced rates as retirement accounts and pension funds. The result is that second layer of tax is deeply discounted if it’s paid at all. EY estimates the second layer for public companies was about eight points, so the combined rate for public C corporations is somewhere in the mid-30s, about 12 points lower than the private-company rate.

One interesting result from the EY study is how much public employment varies state-by-state and city-by-city. Public companies account for nearly half of all jobs in Nashville, Tenn., but fewer than 1 in 5 jobs in Portland, Ore. Senate Finance Committee Chairman Ron Wyden might want to consider that when crafting his alternative to Mr. Neal’s bill.

The Neal bill would hurt private companies and the workers that rely on them. It would accelerate the consolidation of economic power and decision making into the C-suites of a few thousand public companies, leaving thousands of communities worse off. The bill is bad for Main Street and bad for the country.

Mr. Reardon is the president of the S Corporation Association and a former White House official at the National Economic Council under President George W. Bush.

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