Crazy Tax Legislation

New York Democrat, and House Ways and Means Committee Chairman, Charles Rangel, introduced major tax reform legislation yesterday (10/25/07). He hopes that his bill will pass during the legislative session in 2008. Many news sources have called it the most significant change to the Internal Revenue Code since the Tax Reform Act of 1986. Although, the bill is supposed to include billions of dollars in individual and corporate tax relief, it is simply an attack on the high income taxpayers. One positive note about the bill is that it would permanently eliminate the alternative minimum tax starting in 2008 and would increase the reach of the earned income credit, the standard deduction, and the child tax credit. However, because of those tax benefits, a burden has to fall somewhere. Congressman Rangel is proposing a 4% surtax on high income taxpayers who have an adjusted gross income of $150,000 for single taxpayers, and $200,000 for married taxpayers filing jointly.

The reform bill will also proposes decreasing the highest corporate tax rate to 30.5%, repealing the domestic production deduction, and prohibiting the use of the last-in, first-out (LIFO) inventory method. The bill would also do away with several foreign tax benefits.

This bill is very problematic. The single greatest flaw in Mr. Rangel’s bill is the ignorance that it displays toward small business owners. As one client of mine pointed out to me yesterday on the phone, small business owners are a major part of the U.S. economy. In fact, 40 million Americans are employed at business with 100 or fewer employees according to the U.S Labor department.

Nearly all small business owners house their businesses in pass-through entities that push their businesses earnings onto their personal tax returns. Mr. Rangel’s bill will have a direct adverse impact on those small business owners and their ability to grow their small businesses. Mr. Rangel’s bill will push any business owner’s tax rate making over $200,000 to 44% and anyone fortunate enough to make $500,000 to 45%. While these amounts sounds like more than a good living, any small business owner can tell you that the amount he or she is taxed on is not what he or she takes home. Current earnings are needed to keep the businesses going, to buy inventory, to maintain working capital, and to pay employees. The truly baffling part of the bill is that Mr. Rangel lowers the corporate tax rate to 30.5%, giving that largest tax break of the bill to big businesses. The loss of tax revenue from this move is estimated at $364 billion. Small business owners will not benefit from this corporate tax cut. Generally only publicly held corporations elect to be taxed at the corporate level. The vast majority of small business owners elect to have their business earnings taxed on their individual tax returns. The bottom line is that regardless of your political persuasion small business owners will pay if this bill passes.