The President’s budget is out and, as usual, it includes a number of retread proposals to hike taxes on pass-through businesses, including the Buffett Tax and a big hike in the capital gains tax.  We’ve dealt with these in the past.

There is, however, a new tax hike directly targeted at the Main Street Employer next door – an expansion of the Net Investment Income Tax (NIIT) to include all S corporation shareholders and other pass-through business owners.

The NIIT was enacted to help pay for the Affordable Care Act and is designed to tax the investment income of taxpayers making more than $250,000.  The 3.8 percent tax applies to dividends, capital gains, and other forms of investment income.  It also applies to the active business income of S corporation shareholders, partners, and LLC members, but only if they are NOT active in the operation of the business.  If they work at the business, then the 3.8 percent tax does not apply.

Under the heading of “Rationalize Net Investment Income and Self-Employment Contributions,” the Administration’s proposal would have the NIIT apply to all pass-through income, regardless of whether the taxpayer is active in the business.

  • The result of this policy would be to increase the top rate on all pass-through business income to 44.6 percent, further lengthening the gap between the top tax rates on pass-through employers and the 35 percent top rate paid by the C corporations with whom they compete.
  • It also flies in the face of the Administration’s continued support for cutting the corporate rate to 28 percent or less.  Why is it good policy to cut the marginal rates of one business, while hiking the tax rates on another?

This idea is going nowhere fast, but they do make clear the level of hostility this Administration has for Main Street Employers.