The Senate is voting today on legislation to swap the sequester spending cuts with a package evenly divided between other spending cuts and targeted tax hikes.

The core tax hike in this package is our old friend - the Buffett Tax. We’ve previously pointed out the serious flaws in both the premise and the execution of the Buffett Tax. The provision contained in S. 388 suffers from all these flaws.

How would it work?

In this case, the bill would impose a new, minimum tax of 30 percent on taxpayers earning $5 million or more. The minimum tax would begin to phase-in once a taxpayer’s income rises above $1 million. In effect, the new tax would result in three distinct tax codes, each with its own rate schedule and definition of income:

  • The Individual Income Tax
  • The Alternative Minimum Tax
  • The New Fair Share Tax

So, if enacted, shareholders of successful S corporations and other taxpayers would be forced to calculate their taxes three different ways. First, they’d have to calculate their regular income tax, then they’d have to calculate their liability under the AMT, and then, finally, they’d have to calculate their new Fair Share tax obligation. In the end, they would pay whichever is greater.

For successful S corporations and other pass-through businesses, this policy would just add to the long list of tax challenges they face. C corporations would not pay the Buffett Tax just as they don’t pay the individual AMT (there is a corporate AMT, but it doesn’t seem as pervasive). And unlike C corporations, the top rates on pass-through businesses just went up from 35 percent to a high of nearly 45 percent.

At a time when the rest of Washington is focused on tax reform, the Senate is considering policies that move in exactly the opposite direction. This is anti-tax reform, but apparently it polls well, so it’s in the package.  The Senate will defeat this effort to swap lower spending for higher taxes today, and at some point, serious minds will assert themselves and begin to consider serious efforts at comprehensive tax reform that lowers the rates and broadens the base. In the meantime, we have this.

“Corporate-Only” Tax Reform

It’s hard to distinguish “corporate” tax reform advocates with “corporate-only” advocates these days. We like the former and work closely with them to support comprehensive tax reform - reform that includes individuals, pass-through businesses and C corporations. On the other hand, the latter group seems to spend as much time pushing for higher taxes on pass-through businesses as they do calling for lower rates on C corporations. They are definitely not our friends.

So, which category does this group fall into?

We are writing as a group of academic and consulting economists who believe that the U.S. corporate income tax rate should be reduced from its current 35 percent level to one that is competitive with the rates in almost all other major industrial countries.Such a move would likely lead to a more efficient allocation of resources, increased investment and employment in the United States, and higher wages.

Let’s be clear. We agree that the 35 percent corporate rate is too high and should come down. Moreover, many of the 20 economists who signed the letter are our friends and agree with us nine times out of ten on what constitutes “good tax policy.”

That being said, what about the rates imposed on pass-through businesses? The letter is silent on them despite the fact that those businesses that earn most of the business income and employ most of the workers? Their top rate is closer to 45 percent, not 35 percent. That higher rate also “undermines job creation and reduces wages,” doesn’t it?

You bet it does, but this economist statement fails to acknowledge even the existence of America’s flow-through sector and it ignores the impact of the new higher rates on pass-through businesses and the 70 million workers they employ. Worse, by limiting its focus to rate reduction for C corporations, it lends credibility to those few remaining voices who argue that the “corporate-only” approach is both feasible and good policy. The simple response is its not - Congress either tackles tax reform in a comprehensive manner or not at all.

Perhaps it’s time for a “Pass-Through Business Economist Statement.”