The Rate Debate Continues…

The Rate Debate Continues…

Finance Committee Chairman Max Baucus staked out unique turf yesterday, calling for keeping tax policy stable for middle class taxpayers, allowing rates to rise for taxpayers making more than $250,000, but for taxing capital gains and dividends at 20 percent.  AsBNAreports:

“I’m going for policy, and I think 20 percent for both capital gains and dividends is the right policy,” Baucus told reporters. Baucus acknowledged that the tax cut would specifically benefit the same $200,000 per year individuals that he has said should not expect to see their ordinary income tax rates cut again for 2011, but said the difference is that capital gains and dividends deserve to be treated the same under the tax code.

For wages and salary income for top-earning taxpayers, Baucus reiterated his position that Congress should focus on permanent tax cuts for only middle-class households and not entertain any temporary extensions of tax cuts for high-income individuals.

In effect, Senator Baucus is pressing for the tax policies outlined in President Obama’s budget.  That budget called for taxing dividends at 20 percent, but the rhetorical battle over the past year has allowed that fact to slip aside.  As your S corporation advocates, we feel compelled to observe the inconsistency of a policy that would keep (dividend) rates low for C corporation shareholders but would allow rates to go up for S corporation shareholders.  Why is one better than the other?

Exactly how all this gets done also is unclear.  There may be some effort in the Senate to bring up and pass a Baucus-like bill before the Senate adjourns (probably at the end of next week now), but that effort will likely be wrapped up with strict limits on debate and amendments, and the Republican minority has been successful this Congress blocking such requests.

If the Majority Leader wants to get anything done before the elections, he’ll need to set some time aside and let the Senate work its will.  With time so short, we don’t expect that to happen.

S-CORP inWall Street Journal

With the focus on flow-through businesses and the pending tax hikes, your S-CORP team is getting more press these days.  The latest was earlier this week in theWall Street Journal, where journalist John D. McKinnon quoted S-CORP Executive Director Brian Reardon on a story summarizing the rate debate.  As theJournalwrites:

Republicans cite studies showing roughly half of all such income would be affected by raising the top two rates. Democrats say only about 3% of households reporting such income account for that half. That suggests much of the income comes from big businesses operating under small-business structures, they say. Businesses affected by the top tax rates include all sorts of concerns, from farms and manufacturers to high-tech and professional firms.

That trend has been under way for years. Congress authorized Subchapter S corporations in 1958 to encourage the growth of small companies. The popularity of pass-through entities grew in the 1980s with the lowering of individual tax rates and other rule changes.

By now, “the vast majority of employers in this country are organized as flow-throughs,” said Brian Reardon, executive director of the S Corporation Association, which represents such companies.

Later, John gets to the heart of the matter:

But the new-found importance of such enterprises-regardless of their size-means raising individual tax rates could have significant economic impacts. This week, Moody’s said raising taxes on higher earners would reduce GDP by 0.4 percentage point in 2011, while payroll employment would be 770,000 lower by mid-2012.

As we’ve pointed out before, the debate over tax rates is really a debate about jobs.  The current obsession of policymakers over distinctions between small and large businesses or manufacturers verses professional services businesses is really beside the point.  There are S corporations and partnerships in all business sectors, and they are all employers.


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