Faculty Insight: Taxing the rich without sabotaging small business, a proposal for compromise

By Dan Palmon, William Von Minden Professor and Department Chair, Accounting & Information Systems

If the rich were defined as earning $1 million or more and companies generating less than $10 million in annual income were exempt from paying income taxes, it would represent a fair compromise between the Democratic and Republican tax proposals. 

I pride myself in being an open-minded person so I listen carefully to what both the Democrats and the Republicans are saying about taxes. What I hear from the Democrats is a strong support for President Obama’s proposal to increase the tax on the rich. That makes a lot of sense to me. I agree we all must pay what he calls our “fair share.” The deficit is now at alarming levels so if we can collect more money from those who have too much of it, why not. But like most proposals the devil is in the details.

Apparently, Obama believes that families whose income is over $250,000 are rich. I am not so sure. Yesterday I met a friend who works as a teacher in New York City. He supplements his income by giving private lessons in the evenings and weekends. His wife works full time as a pharmacist in a local drug store. They have three children, two are in college, and their combined income is just above $250,000.

Anybody who knows something about the high cost of living in New York City will tell you that they are not rich. They certainly feel that right now if you combined the income taxes they pay to the federal government, to New York State and to New York City, the total is more than their “fair share.” 

My suggestion to President Obama is to rethink the threshold for “rich.” Why not increase it to one million? This way the President can be much more effective in selling his program because he can truly refer to the rich as millionaires and billionaires.

I am also listening to the Republicans. They claim that any increase in taxes on the rich is bad for the economy because it will have a negative impact on small businesses. That makes a lot of sense to me because of the critical role small businesses play in the creation of new jobs in our country. 

I am aware of the controversy regarding Governor Romney statement that corporations are people and have no comment to make. What I do know is that most small businesses are organized as subchapter S corporation and therefore file one tax return for themselves and their businesses. They do that because the alternative of filing as a C Corporation will expose them to double taxation.

So, at least, when it comes to small businesses, corporations are people and people are corporations. Therefore when the president argues that the rich people must pay their “fair share,” he is also taxing small business corporations thereby hindering job creation.

There is a better way. We can increase taxes on the rich without hurting small businesses. Why not treat small business owners as people and their businesses as corporations by having them file separately? As long as the owner doesn’t pay herself salary or dividends from the corporation there is no sense in charging her taxes. Once she pays herself so much that she becomes “rich” she will have to pay her ‘fair share” like everybody else.

As to the corporation, as long as it is “small business” it should be completely exempt from paying taxes so that it can grow, hire more workers and help the economy. Hopefully when that happens and the small business becomes big we can remove the tax exemption. My idea of the cutoff line is in the area of $10 million of income. I strongly believe that zero income tax on businesses with less than $10 million of income, coupled with increasing income tax on real millionaires and billionaires is a reasonable compromise between the positions of the two parties and it is “fair.”

TAGS: Accounting Dan Palmon Faculty Insights Information Systems Thought Leadership