Posts Tagged ‘Fiscal Cliff’

Fiscal Cliff Solution November 2012

November 17, 2012

Paul Krugman, in his “Let’s Not Make A Deal” column of the November 8, 2012 New York Times, implored the President to hang tough and not agree to an extension of the Bush era tax cuts for the “wealthy”, which the President defines as married couples making more than $250,000 a year.  On principle, I agree with Prof. Krugman.  However, there is room to compromise without selling out the voters.

Speaker Boehner said after the election that he does not want to raise tax rates because he does not want to hurt small businesses.  But we know that many unincorporated businesses are not really small, including giant construction companies (such as Bechtel) and hedge funds.   The President has proposed to reduce the corporate tax rate while also eliminating loopholes in the tax code that allow many corporations to pay a much lower effective tax rate that the top nominal corporate tax rate.  Companies like Bechtel should incorporate and pay that reduced corporate tax rate.  Hedge fund managers should no longer be shielded from taxes by the “carried interest” provision.

In our town, there are many people running small businesses, and many of those small businesses are incorporated.  There must be a way to protect small businesses that are not incorporated, while at the same time raising the rates for households making more than $250,000.  For example, the tax code could define a new category of small business that allows a lower tax rate (equal to the corporate tax rate) for businesses that employ fewer than 20 people. Perhaps only retained earnings would be eligible for the lower tax rate.  Or perhaps the proprietor would be allowed to declare that a certain amount of earning per employee (say $5,000 or $10,000 per employee) would be taxed at the lower tax rate.

When combined with a reduction in tax expenditures (“loopholes”), a small increase in tax rates on high-income households, but not small businesses filing under this new category, might generate enough additional revenue to satisfy the president as part of a grand bargain to gradually bring down the federal deficit.