Estate Tax & PAYGO
Of interest to S-CORP readers, the bill to be considered by the House (H.R. 2920) specifically exempts four policies from the Paygo rules:
- Adopting the doctor payment fix proposed to Medicare;
- Extending the higher exemption levels under the Alternative Minimum Tax;
- Extending select tax cuts from the 2001 and 2003 tax bills; and
- Extending the 2009 estate tax rules to 2010 and beyond.
In other words, Congress is seeking to ensure it pays for any tax cuts or spending increases, except for the four policies listed above. As the Congressional Budget Office reported, “In effect, that rule would allow the Congress to enact legislation that would increase deficits by an amount in the vicinity of $3 trillion over the 2010-2019 period without triggering a sequestration.”
The theory behind the exemption is to allow Congress room to continue “current policy” in each of these areas. The $1000 child tax credit, for example, expires at the end of 2010. Extending the credit would reduce revenues by $243 billion over ten years. H.R. 2920 shields this cost and the cost of other similar policies from Paygo.
What does this signal for estate taxes? The policy exempted in H.R. 2920 is an extension of estate tax rules for 2009. As the bill outlines:
(B) with respect to the estate and gift tax, assume that the tax rates, nominal exemption amounts, and related parameters in effect for tax year 2009 remain in effect thereafter without change;
The exempted policy is consistent with the Obama Administration’s budget proposal and was scored by the JCT to reduce revenues by $243 billion over ten years. What doesn’t get exempted is any further reduction in the estate tax beyond the 2009 rules.
For example, Members have been working on a compromise that would lower the estate tax rate to 35 percent and increase the exemption to $5 million per spouse. That’s certainly better than the 2009 levels of 45 percent and $3.5 million but, under H.R. 2920, the increased revenue reduction from the compromise would need to be offset with tax increases elsewhere.
Where would Congress find offsets to a potential estate tax compromise? Both the Obama Administration and Congressman Pomeroy (D-ND) have proposed targeting family businesses for higher taxes by inflating the value of their estates. Exactly how much revenue this would raise is unclear, but family businesses need to be on alert.
A package that lowers rates below 2009 levels while inflating the tax base has the potential to raise, not lower, estate taxes on family-owned enterprises and may be no compromise at all.
Do Small Businesses Really Create All Those Jobs?
A recent paper by Alan Viard at the American Enterprise Institute raises two fundamental questions: Are smaller firms responsible for creating a majority of new jobs in our economy and is there a bias towards smaller firms in the tax code? With small businesses at the epicenter of the debate on reforming our health care system, clearing the record on these questions is critical.
The “small businesses do not really create all those jobs” argument has been around for a long time. However, it is usually raised by folks with a history of supporting Big Government and Big Business. Thus, having someone with Alan’s background on the other side is a new twist.
Regardless of who asks the question, however, the answer is the same. Yes, small businesses really do create all those jobs. Here’s what the Small Business Administration’s (SBA) Office of Advocacy writes:
Since the mid-1990s, small businesses have created 60 to 80 percent of the net new jobs. In the most recent year with data (2005), employer firms with fewer than 500 employees created 979,102 net new jobs, or 78.9 percent. Meanwhile, large firms with 500 or more employees added 262,326 net new jobs or 21.1 percent.
Critics argue that this analysis suffers from several flaws, including how to best classify firms using longitudinal data. For example, if a firm begins at 450 employees and grows to 550, the SBA says that’s 100 jobs created by small business. But if the same firm shrinks from 550 to 450 employees the next year, it’s a loss of 100 jobs for big business. Classifying the firm based on its initial size biases the results in favor of smaller firms.
But seriously, how many firms “cross the threshold” each year? There simply are not that many firms with more than 500 employees. Adjusting for these instances may move some numbers around, but the basic tenet remains intact — businesses employing fewer folks create most of the new jobs and policymakers should pay attention.
A study from the Bureau of Labor Statistics adjusting for these statistical challenges found that firms with fewer than 500 employees created about 80 percent of net new jobs. Enough said.
The question of whether the tax code is biased towards small businesses is more difficult. The tax code, after all is incredibly complex and it does include numerous provisions — like Section 179 — targeted to help smaller enterprises. How do you tally up all the variables?
S-CORP readers may remember Dr. Viard from the LIFO debate. Alan pointed out that, if LIFO accounting is an undeserved tax windfall, why is the effective tax burden under LIFO similar to that tax burden shouldered by other forms of capital investment? How could it be a windfall if the tax burden is the same?
The same approach may work here as well. If the tax code is too small business friendly, then the effective tax burden on S corporations, partnerships, and sole proprietorships should be lower than for other taxpayers. But a study commissioned by the Small Business Administration found that the effective tax burden for small businesses (including small C corporations) in 2004 was 19.8 percent, or 3.5 points above the average for all taxpayers that year. S corporations, by the way, faced the highest effective rate of 26.9 percent.
Moreover, limiting the analysis to income and payroll taxes does small business a disservice. Home Depot doesn’t worry about the estate tax, the family-owned lumber yard down the street does. And studies show that the burden of federal regulations falls more heavily on smaller firms than larger ones.
Finally, we believe Alan’s argument misses a broader point. Your S-CORP team is not comprised of legal theorists, but we do recall that government grants corporations the same legal status as individuals in order to encourage their creation and economic growth. Corporations can enter into contracts and appear in court. Perhaps most importantly, the owners of corporations are shielded from liability.
The S corporation was created, in part, to counter the advantage the corporate structure gives to larger firms. The idea behind the S corporation was to allow smaller firms to thrive by extending some of the essentials of the corporate structure without the onerous tax rules. But S corporation rules also limit their ability to grow and raise capital. They limit the number and type of shareholder and they limit how the firm can be structured. How do these rules enter into the question of bias in the tax code?
The bottom line is that the effective tax rate on small businesses is higher than the rate for taxpayers in general. Given that reality, it’s difficult to see how small businesses are somehow advantaged. If Congress wants to help larger businesses by cutting the corporate rate, we’re all for it. But don’t forget who creates most of the jobs out there. It’s small business, and during economic downturns, the role they play is more important than ever.
Budget Debate and Taxes
Everyone in Washington knows Congress will have to address the growth of the Alternative Minimum Tax (AMT) and the expiration of popular tax provisions over the next three years. Just how they will go about it, however, is very much up in the air.
Both the House and the Senate are considering their respective budgets this week. Lots goes into a federal budget, as you can imagine, but nothing is more important for S corporations than how this budget will address the AMT and expiring tax provisions.
On this question, the House and Senate are moving in opposite directions. The House wants to offset the full revenue impact of extending the AMT patch and related expiring tax provisions while the Senate does not.
This difference is reflected in their budgets. The House budget calls for enacting a revenue neutral tax package with a simple majority vote in both the House and the Senate, while the Senate budget would require this package to gain 60 votes in order to pass.
As CongressDaily reported this morning, this fight is a replay of the challenge that confronted Congress last year:
On the tax side, Spratt said House Democrats would stand with the Blue Dog Coalition and insist that a one-year patch to the alternative minimum tax be fully offset. Last year, the Senate was unable to muster the votes for a fully offset AMT patch, and House Democrats were forced to allow an unfunded fix to be enacted. “We’re very insistent on seeing that this time, when we do the AMT extension, the AMT patch, it be offset,” Spratt said. “On the other hand,” he added, “Since Conrad has some problems mustering the votes for that in the Senate, we’ll have to wait and see how it comes out.”
Your S Corp team would point out that while this battle is very serious in its own right, it is merely a precursor to a much larger tax fight that will take place when an increasing share of the tax code expires in coming years.
How big is this impending challenge? The Congressional Budget Office has conveniently put together a table of all the expiring tax provisions between now and 2018 and how much revenue would be lost by their extension.
A few comments are in order. First, just extending the so-called family tax relief—the new 10-percent bracket, the marriage penalty relief, and the refundable $1,000 child credit—will reduce revenues by nearly $650 billion between now and 2018.
Second, the full scope of total expiring provisions is staggering—nearly 100 tax provisions expire between now and 2018. Measured by their revenue, that’s nearly $4 trillion in current tax benefits that will go away between now and then, or about 10 percent of total projected revenue.
Third, the expiration of these provisions is taking place within the context of a rising tax burden, as projected federal revenues take an increasing share of our total national income. According to the CBO, the total tax bite will rise from 17.9 percent this year to 20.3 percent in 2018.
If Congress lives up to its intention to use Pay-As-You-Go budgeting (Paygo), where the extension of any expiring tax provision must be offset with tax increases elsewhere, then we’re looking at an effective real tax increase on families and businesses of unprecedented proportions in coming years.
Paygo and Tax Increases
As you may have noticed, a real concern of the S corporation community these days is the combination of multiple expiring tax provisions and the application of Paygo budgeting.
Consider how this works in practice. In 2010, S corporation shareholder Jim is subject to the top tax rate of 35 percent on both his salary and his business income. In that business, he takes advantage of Section 179 expensing. He also uses LIFO (Last-In, First-Out) inventory accounting and has an IC-DISC (Interest Charge Domestic International Sales Corporation) for his growing export business.
Absent congressional action, in tax year 2011 Jim’s tax rate will rise to 39.6 percent and his ability to write-off new capital investments will decline from more than $125,000 per year to $25,000. In other words, Jim is facing a sharp increase in his federal taxes in 2011.
Under Paygo, Congress can extend Jim’s lower rate and preserve current levels of expensing only by raising taxes elsewhere. (Technically, Congress could cut spending as an offset too, but to date has refrained from using that option.)
So to comply with Paygo, Congress could temporarily extend the lower tax rates and higher expensing limit by, among other offsets, permanently repealing LIFO accounting and the IC-DISC. This being Congress, they would then send out a press release letting Jim know how they prevented his taxes from going up.
But Jim’s taxes did go up. Yes, he retains the lower 35 percent tax on his income and the ability to write-off $125,000 of his capital investments, but he no longer has the ability to use LIFO accounting nor the IC-DISC.
As this example demonstrates, the combination of expiring tax relief and Paygo budgeting has tag-teamed Jim into a significant tax increase.
What’s particularly pernicious about Paygo is Congress’ ongoing habit of making tax relief provisions temporary while making their offsetting tax increases permanent. This combination ensures that tax collections in the future will rise above current projections.
As we mentioned earlier, the total federal tax bite is estimated to increase to record levels in the next decade. The combination of expiring temporary tax relief, permanent offsets, and Paygo will only serve to raise that burden even higher.
Peering into the Future of Tax Policy
We’ve been asked to gaze into our crystal ball and see what the future of tax policy looks like. For S Corporations, it looks a lot like when the Ghost of Christmas Future popped in to see Ebenezer Scrooge. Nothing has been etched in stone yet, but it’s still not a pretty picture of things to come.
On the macro level, three factors are going to frame the tax policy debate in the next Congress:
1. All the tax relief enacted in 2001 and 2003 expires at the end of 2010. Unless Congress takes action, tax rates on individuals and flow-through businesses, the child credit, estate tax, marriage penalty, small business expensing, etc all revert to their pre-2001 levels.
2. The Alternative Minimum Tax will continue to take over the tax code. In tax year 2007, about five million taxpayers will pay AMT. Absent action, that number will rise to 25 million in 2008 and grow from there.
3. The long term budget deficit picture is bleak. Over the next five years, the federal budget actually moves towards balance. Beyond five years, however, the growth of Social Security and Medicare will crowd out all other categories of federal spending, driving up deficits to unsustainable levels.
The combination of 1 & 2 also raises the projected federal tax burden on families and businesses to historic levels. As the CBO reports:
Under the assumption that current laws and policies will remain the same, total revenues reach 20.3 percent of GDP in 2018, a level not reached since 2000, and prior to that, not since World War II.
So the baseline is higher taxes on S corporations (and everybody else) together with growing deficits. With that as the backdrop, what is likely to happen? While much depends on who controls Congress and sits in the Oval Office next year, a couple things are clear.
First, the bias is for tax rates to rise. If Congress chooses to do nothing, or even if it’s deadlocked and unable to move meaningful tax bills that take the tax code in either direction, rates are going to go up.
Second, the current obsession with “pay-as-you-go” tax policy will pressure Congress to raise rates even higher. For example, Democrats and Republicans alike are eager to extend the $1000 child tax credit and marriage penalty relief. But extending this tax relief counts against the baseline and under PAYGO would require an offset.
That’s the dilemma for PAYGO advocates. They want to extend the tax relief for middle income families, but they want to offset the associated revenue loss too.
How high is the revenue loss? The President’s recent budget submission puts the ten-year revenue loss of the child credit and marriage penalty provisions at over $300 billion—more than the cost of extending the lower rates on dividends and capital gains.
Add to that the cost of eliminating the AMT and you get a sense of just how hungry Congress is going to be for tax revenues in the next three years.
As a result, we expect there to be a big push to enact tax reform next Congress. Ways and Means Chairman Charlie Rangel plans a series of hearings on the issue in coming months and use those hearings as the basis for moving a broad reform package next Congress.
What will it look like? His “Mother” bill introduced last fall is good place to start. We previously highlighted the particular dangers this legislation poses to S corporations. In fairness to Chairman Rangel’s staff, they’ve listened to our concerns and expressed a sincere desire to continue communications. Nonetheless, the factors highlighted above would tie the hands of even the most pro-S corporation Committee. The Mother bill reflects those challenges.
For starters, it assumes all the Bush tax relief expires in 2011. It then reduces taxes (or increases refunds) for lower income families, swaps the AMT for a four-percent surtax on families and businesses earning more than $150,000, and cuts the corporate tax rate while eliminating numerous deductions used by C and S corporations alike. The net result for S corporations is higher tax rates applied to a broader base of income.
The Christmas Carol had a happy ending because Ebenezer changed his behavior and thus his future. In that regard, he had an advantage over S corporations. Ebenezer, after all, was master of his own destiny. The S corporation community must work within the legislative process.
Nonetheless, we do have the ability to influence tax policy. As an Association, we intend to continue to work with our allies to ensure Congress understands the role S corporations play in job creation and economic growth. With a new President, Congress, and tax reform on the table for 2009, this education effort is more important than ever.
President to Sign Fiscal Stimulus
The President is expected to sign the fiscal stimulus package on Wednesday. After two weeks of hand ringing and posturing, the Senate finally adopted a slightly modified version of the bill the House and the President originally had negotiated.
As sent to the President, the package would:
- Send checks of $600 per filer and $300 per child to families with joint incomes of less than $150,000. Actual amounts will be calculated based on income tax filings for 2007, so expect the actual checks to be in the mail by late spring and early summer.
- Encourage new business investment by increasing the limit on small business expensing from $100,000 to $250,000 as well as allow for 50-percent bonus depreciation. Both of these tax breaks are available for equipment placed in service in 2008 only.
- Allow for a temporary, 2-year increase, from $417,000 to $729,750, in the so-called conforming loan limit and limit on FHA-guaranteed loans.
Whether this package benefits the economy will have to be seen. Certainly the speed with which Congress and the Administration came together, even with the delay in the Senate, was impressive and should send a positive signal to families and businesses. The size of the package is significant as well. The short term cost of the family checks and increased expensing—not counting the mortgage relief—is about $150 billion in 2008, or slightly more than 1 percent of the economy.
The challenge, as always for fiscal stimulus, is how to get it done quickly enough to be effective. Under the current time frame, both the rebate checks and the mortgage relief will not be felt until well into the third and fourth quarter of 2008. The remaining question is whether the economy will still be in its mid-cycle slowdown or will be in a recession at that time.
Energy Tax Provisions Move Forward—Again
As expected, the introduction of the President’s budget for fiscal year 2009 fell flat last week, with few, if any, of its proposals getting serious attention.
A week later, in a bit of irony, the House is planning to take up a package of renewable energy tax provisions that were dropped from the President’s budget this year. Given the price of oil, why the Administration would pick this year to end its call for extending renewable energy tax incentives is slightly inexplicable.
The House action is curious as well, given the repeated failure of Congress and the Administration to agree how to pay for the extension of these and other tax items in 2007. Staff involved in the drafting expect the bill to look very similar to the House energy tax package from last year, despite the failure of that package to get past the Senate. As BNA noted this morning:
Democrats in both chambers produced energy tax packages in 2007 that were designed to encourage the use of alternative and clean energy at the expense of oil and gas producers. But resistance from Senate Republicans–and a firm stance by President Bush that he will not sign into law any bill that would raise taxes–killed Democratic efforts.
Absent the emergence of a new, non-controversial offset, the fate of this effort is likely to be similar to the energy tax packages considered late last year.
For S corporations, the lesson should be clear. The consensus that brought Congress and the President together on the stimulus package has vanished.
Tax extenders like the energy tax credits, AMT patch, and the R&E tax credit are considered to be “must-pass” items. To get them done, however, congressional leadership will need to bridge the competing interests of “pay-as-you-go” budgeting with the concerns of the President and others who oppose seeing the overall tax burden increase under their watch.
Moving the same energy tax package that failed previously suggests congressional leaders haven’t worked that out yet, and all the positive tax policy initiatives that benefit S corporations and other actors in the economy will have to wait until they do.
AMT Dominates Tax Outlook
For the past few months, we’ve been tracking the progress, or lack thereof, of legislation to protect taxpayers from the growth of the Alternative Minimum Tax. The two principle points of tension were:
- Conflicting approaches between the House and the Senate. The House, under the leadership of Chairman Charlie Rangel, was pressing to do something permanent. The Senate, on the other hand, made it clear that they were only interested in a one or two year “patch” to temporarily stem the growth of AMT taxpayers.
- Conflicting approaches on how to offset the revenue impact of addressing the AMT, or whether to offset the cost at all. Even a one-year AMT patch would reduce revenues by about $55 billion. Coming up with that level of corresponding, and politically salable, tax increases would be extremely difficult.
A couple of events occurred yesterday that brought these two tensions out into the open. First, Chairman Rangel, for the first time, acknowledged that a temporary AMT patch would be necessary this year. While he still intends to introduce a plan to permanently address the growth of the AMT, perhaps as early as next week, he is now suggesting that package may not be considered until next year. For most observers, the need to take up a one-year AMT patch was clear for some time, but this is the first time the House Ways and Means Chairman has confirmed it.
Second, CongressDaily reported this morning that Senator Conrad—Chairman of the Senate Budget Committee and senior member of the Finance Committee—walked out of a Finance members meeting yesterday when he learned that Chairman Baucus did not intend to offset the $55 billion cost of a one-year AMT patch. According to CongressDaily:
“Conrad stormed out of a bipartisan Finance Committee members meeting, telling reporters that the Baucus plan was “unbelievably irresponsible.” “The answer in that room is, ‘Borrow the money from China and Japan and stick the American people with debt as far as the eye can see,’” said a visibly outraged Conrad. According to other sources in the meeting, Baucus proposed to waive pay/go for the one-year AMT patch, while providing offsets for $45 billion in expiring business tax provisions, which would be extended through the end of 2009.”
Exactly what this means for the expected AMT/Extender/Miscellaneous tax package that needs to move before the end of the year is unclear. Congress will have to address the short-term AMT challenge. Otherwise, about 20 million taxpayers, mostly families with children, will see their taxes increase when they file on April 15, 2008. Two possibilities are a compromise between Baucus and Conrad on the level of offsets in the package, or an effort by Baucus to find votes for his package from the Republican members of his Committee.
Treasury Issues a New Tax Gap Report
This morning, the Treasury and the IRS released the new “tax gap” report. This report is in response to a request from Senate Finance Committee Chairman Max Baucus that the Treasury produce a plan to reduce the “tax gap” to 10 percent by the year 2017. The most recent estimate of the tax gap, for tax year 2001, was 16 percent. Or, if you prefer the glass to be half full, the U.S has a compliance rate of 84 percent, one of the highest in the world.
The real news here is the lack of new proposals for addressing the tax gap. Treasury has been under considerable pressure to produce additional ideas, but appears to be standing pat with the proposals it offered as part of the 2008 budget. As the report notes, closing the tax gap in a meaningful way is not going to be easy:
“Based on the limited information available, compliance rates appear to have remained relatively stable at around 85 percent for decades. To make a meaningful improvement in this number without a fundamental change in the relationship between taxpayers and the government will require a long-term, focused effort.”
And the report goes on to say;
“…while it may be possible to take action to reduce the tax gap, it is not possible to implement a policy that eliminates the tax gap without an unacceptable change in the fundamental nature of the current tax compliance system.”
The report does, however, continue the focus on small business owners and pass-through entities like S corporations and partnerships as the tax gap’s primary source. Nearly three-fourths of the total tax gap is attributed to self-employed and small business owners. In a PAYGO world with lots of spending and tax items on the to-do list, that’s not a good thing.
House Passes Small Business Tax Package — What’s the Next Step?
Real quick, the House just passed its small business tax package (H.R. 976) to accompany the proposed minimum wage increase, 360-45. This action follows a very bipartisan markup last Monday, where the tone of the hearing was a dramatic departure from what we’ve come to expect from Ways and Means meetings. That this comity occurred over a $1 billion package that included no S corporation provisions was a little disconcerting, but it is something we will have to work on.
So what’s the next step? The Senate could take up the House-passed bill, substitute in the Senate’s $8 billion small business tax relief package (including the S corporation tax title we care about), and ask for a conference with the House. Or the two bodies could negotiate away their differences now, and then pass the resulting product out of the Senate and House.
Either way, it looks like the tax writers have two or three weeks of work ahead of them to reconcile their differences. Common ground over the competing revenue raisers should be particularly difficult to find. We’ll keep plugging away to ensure the Senate-passed S corporation provisions survive negotiations and that they take effect immediately.
Senators Offer Middle Class Tax Package
Finance member Charles Schumer (D-NY) and five freshmen Democratic members introduced legislation yesterday (S. 614) to target tax relief at middle class families. According to the authors, the bill would reduce revenues by $137 billion over ten years in order to:
o Double the Child Credit to $2,000 for a child’s first year;
o Increase the dependent care credit to 35 percent for certain families;
o Extend AMT relief; and
o Consolidate existing education deductions in a single, $2,500 credit to cover tuition, fees, and books.
So, in the era of PAYGO, how should the Congress offset $137 billion in tax relief? You guessed it — the tax gap. As BNA reported this morning, “Schumer mentioned several possible ways to pay for the middle class relief, including raising income taxes on families making $400,000 per year, repealing oil industry tax breaks, and/or narrowing the tax gap.”
S corporations and small businesses need to be on their guard that talk about reducing the tax gap doesn’t turn into broad-based tax increases on the small business community. The S corporation payroll tax provision, repealing LIFO accounting rules, and raising taxes on small business exporters are all provisions that have been suggested in the context of addressing the tax gap.
A New Congress Brings New Tax Writers
Last week marked the swearing-in of all new Members of Congress and the official change in control of the House and Senate from Republican to Democratic hands. House Democrats elected Nancy Pelosi (D-CA) Speaker of the House and Senate Democrats elected Senator Harry Reid (D-NV) Senate Majority Leader.
On the Republican side, leadership was also elected – Rep. John Boehner (R-OH) is the Minority Leader of the House and Rep. Roy Blunt (R-MO) is Minority Whip –final committee assignments were also announced. Republican members filled the remaining two vacancies on the tax-writing Ways and Means Committee with Reps. Patrick Tiberi (R-OH) and Jon Porter (R-NV).
Rep. Tiberi represents the 12th Congressional District of Ohio – the middle of the state to the north of Columbus, including Delaware County and parts of Franklin and Licking Counties – while Rep. Porter represents the 3rd Congressional District of Nevada, including the Southern tip and parts of Las Vegas, Henderson and Lake Mead.
S Corp members with operations or significant investments in those states are asked to alert us.
Minimum Wage and Small Business Tax Relief as S Corp members know, the House plans to pass a minimum wage increase as part of their “First 100 Hours” legislative push. The bill would raise the minimum wage from the current $5.15 an hour to $7.25 over the next couple years and is scheduled to be taken up Wednesday, January 10th.
On the Senate side, things may proceed slightly more slowly but with a broader effort that includes tax relief. On Wednesday the 10th, the Senate Finance Committee will hold a hearing on what sort of small business tax breaks should accompany an increased minimum wage, apparently with a goal of marking up the proposals on the 17th.
The idea of a small business tax package is to offset the increased labor costs a higher minimum wage imposes on employers most at risk — America’s small and family-owned business community. As America’s most popular form of small business corporation, S Corps have lots at stake in this debate, and we’re working with our friends to ensure S Corp priorities are recognized. More on this to follow….
President Promotes Extending Tax Relief — House Raises a Barrier
In a very unusual move, the President had his own op-ed published in last Wednesday’s Wall Street Journal outlining his domestic policy plans for the upcoming Congress. Chief among his priorities is to make permanent the tax relief enacted in the first six years of his Administration, including the lower marginal tax rates, small business expensing, and health care provisions enjoyed by S corporations and other closely-held businesses. The President wrote:
It is also a fact that our tax cuts have fueled robust economic growth and record revenues. Because revenues have grown and we’ve done a better job of holding the line on domestic spending, we met our goal of cutting the deficit in half three years ahead of schedule. By continuing these policies, we can balance the federal budget by 2012 while funding our priorities and making the tax cuts permanent. In early February, I will submit a budget that does exactly that. The bottom line is tax relief and spending restraint are good for the American worker, good for the American taxpayer, and good for the federal budget. Now is not the time to raise taxes on the American people.
For S Corps of all sizes, extending the tax relief is a matter of great importance. The marginal rates that apply to individual taxpayers apply to S Corp income as well, and while the focus has always been on the top 35 percent rate, the fact is smaller S Corps would be hurt too, as all the rates would revert to their pre-2001 levels.
While the President was advocating extending his tax relief, the House was approving new budget rules that will make it more difficult to extend existing tax provisions or initiate new ones. The new rules, under the title of PAYGO (for pay-as-you-go) will prohibit any bill affecting direct spending or revenues from increasing the budget deficit, which means future efforts to extend tax relief would need be offset with other tax increases or spending reductions.
With big tickets items like protecting families from the Alternative Minimum Tax and extending the R&E tax credit and other expiring provisions on the agenda, these new rules are going to put increased pressure on Congress to identify offsetting provisions that will raise revenues. Proposals like expanding the application of payroll taxes on S Corp income and eliminating IC-DISCs will likely be part of the discussion. Our job is it educate the new Congress as to why these ideas are bad for small businesses and bad for America.
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