Rate Debate Begins

Majority Leader Harry this week filed a motion to proceed to the Senate Democratic bill (S 3414) to extend the Bush tax cuts for all taxpayers except the top two brackets. A procedural vote is scheduled for tomorrow.

Senate Republicans will push to have a vote on their own version which will extend current tax policies for all brackets. If an agreement is not reached on allowing alternatives, Republicans could try to block consideration of the Democratic bill.

So we now have competing proposals before the US Senate, which begs the question, does Leader Reid have the votes?B He starts with 53 Democratic votes in the Senate, so he should be able to block the Republican plan even if he is unable to move forward on his own, but a number of Democratic Senators have either expressed explicit support for extending all the rates, including Joe Lieberman and Jim Webb, or have kept quiet on exactly what their position is.

As to the specifics, the Democratic bill would extend all the 2001 and 2003 Bush tax cuts with the following exceptions:

The top two income tax rates;

  • The top rates on capital gains and dividends for taxpayers making more than $250,000 ($200,000 for singles);
  • The rates and exemption for the estate tax; and
  • The repeal of limits on itemized deductions.

One key difference between the Senate Democratic legislation and the Administrationbs position is that the Democratic bill would raise dividend tax rates to 25 percent, rather than the 45 percent under the Presidentbs budget.

While not an exact fit, the Ernst & Young study released last week should give policy makers a clear idea of the long-term consequences of allowing the top rates to rise on income earners and business owners.B It would mean fewer jobs, lower wages, and a smaller economy.

House Introduces Plan

B Meanwhile, the House has released their own plan to keep tax rates stable while putting into place a process for tax reform.B Encompassed in two bills — HR 8 and HR 6169 — the legislation would:

Extend for an additional year, through 2013, the tax reductions originally enacted in 2001 and 2003;

  • Provide a two-year AMT patch (covering 2012 and 2013); and
  • Provide for expedited consideration of tax reform in the 113th Congress.

As to what tax reform would look like, the legislation calls on Congress to take up a bill that bcontains at least each of the following proposals:

B (1) a consolidation of the current 6 individual income tax brackets into not more than two brackets of 10 and not more than 25 percent;

(2) a reduction in the corporate tax rate to not greater than 25 percent;

(3) a repeal of the Alternative Minimum Tax;

(4) a broadening of the tax base to maintain revenue between 18 and 19 percent of the economy; and

(5) a change from a bbworldwidebb to a bbterritorialbb system of taxation.b

In other words, the legislation outlined here appears to be fully consistent with the principles included in our Pass-Through Coalition Letter sent up to the Hill last fall and are something the business community, particularly those who represent a significant number of pass-through businesses, should support.

Taxing Employers

One key statistic that emerged from last weekbs roll-out of the Ernst & Young study was something we had overlooked from the Treasury report on small businesses, published last August.B Our friends at NFIB pointed it out.

The study, entitled bMethodology to Identify Small Businesses and Their Owners,b was prepared by the Office of Tax Analysis with an eye towards redefining away small business, but many of its numbers have been extremely helpful in defending business owners, including this one:

  • 28 percent of business employers in the United States have incomes exceeding $200,000.

You read that correctly — more than one in four business employers has income high enough to be subject to the higher tax rates at the center of the rate debate.

How exactly does this number compare to the favorite talking point of the other side — that these rates apply to less than three percent of small business owners?B Here are a couple differences:

  • The larger number includes employers only — people who create jobs.B The three percent number includes taxpayers reporting any level of business income, no matter how small.
  • The larger number includes taxpayers with more than $200,000 in income, while the smaller number is restricted to those who pay the top two rates.
  • And finally, the larger number includes those employers who pay the Alternative Minimum Tax.B They may have income high enough to pay the top two rates, but they pay the AMT instead.

This latter point is something that came out our of Ernst & Young study.B More than half the business owners who would otherwise pay the top two rates are actually captured by the AMT instead (1.2 million out of a total 2.1 million) and are not counted in estimates of how many business owners would be affected.B If Congress were to reform or eliminate the AMT, they would suddenly become part of the pool.

So what is our take-away?B This is a debate about jobs and investment, and the Treasury estimate above suggests that proposals to raise the top two rates will directly impact a large number of employers, and has the potential to impact even more — just more evidence that raising rates on private businesses will be bad for jobs and investment.

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