So, we now have the tax returns for President Obama, Governor Romney, and Speaker Gingrich. Did anybody notice that the S corporation owner is the one with the highest effective tax rate?
Seriously, of the three, Newt Gingrich paid the highest effective tax (32 percent), followed by President Obama at 26 percent and then by Governor Romney at 14 percent. Given that the Wall Street Journal is reporting that S corporations pay no tax at all, that result might come as a surprise to their readers.
On the other hand, readers of the more authoritative S-Corp Washington Wire understand that of the four business structures — S corporations, partnerships, C corporations, and sole proprietorships — the Small Business Administration found that S corporations paid the highest effective tax rate for firms with less than $10 million in revenues. S corporations paid 27 percent, while C corporations paid just 18 percent.
To be fair, this estimate doesn’t include the second layer of tax paid by C corporation shareholders. Add in the shareholder tax on capital gains and dividends, and the effective rates for C and S corporations are probably about the same. We’ve been pointing that out for two years now.
But wait. Doesn’t this same “ second layer of tax” apply to some of Mitt Romney’s income? A cursory look at his return suggests that a good portion of it is investment income that has already been subject to the corporate layer of tax. In that case, his real effective tax rate — including any taxes paid by corporations he owns — should be significantly higher. The same can be said for Warren Buffett.
Which brings us to the President’s State of the Union speech. In it, he called for a new “ minimum tax” to ensure millionaires pay a minimum tax to the federal government. Here’s what he said:
Tax reform should follow the Buffett Rule. If you make more than $1 million a year, you should not pay less than 30 percent in taxes. And my Republican friend Tom Coburn is right: Washington should stop subsidizing millionaires. In fact, if you’re earning a million dollars a year, you shouldn’t get special tax subsidies or deductions. On the other hand, if you make under $250,000 a year, like 98 percent of American families, your taxes shouldn’t go up. You’re the ones struggling with rising costs and stagnant wages. You’re the ones who need relief.
Now, you can call this class warfare all you want. But asking a billionaire to pay at least as much as his secretary in taxes? Most Americans would call that common sense.
The 30 percent threshold is new. Before, the rhetoric around the Buffett Rule was simply that the millionaire should pay more than the secretary. This new approach is described in the “ Blueprint” document that accompanied the speech. It says:
Make the tax code fairer and simpler for the middle class and make sure millionaires and billionaires follow the Buffett Rule by paying at least 30% in taxes.
Later, the Blueprint calls for corporate reform that, among other things, lowers corporate rates:
The President believes that we need comprehensive corporate tax reform that will close loopholes, lower rates, and eliminate incentives that make it more attractive to ship jobs overseas.
So, the President is advocating for raising rates on capital gains and dividends, but he’s also advocating for cutting corporate rates. The former is part of his “ fairness” agenda and the latter is part of a “ jobs” agenda.
How does it balance out? The total tax on corporate profits equals the corporate tax combined with the dividend and capital gains tax paid by shareholders like Mitt Romney. Today, that tax is equal to 45 percent (35 percent corporate first and 15 percent dividends/cap gains second). Assuming the President calls for a 25 percent corporate rate as part of his corporate tax reform, then the total tax on corporate profits in the future would be 25 percent first and 30 percent second, or 47.5 percent. The tax on corporate profits would go up.
In other words, the President’s “fairness” agenda totally trumps the President’s “ jobs” agenda. Kind of shows you where his priorities are.