Ideas: How to minimize the damage from Obama’s tax grab …

I really don’t understand why Obama and Boehner are having such a hard time resolving the “revenue” issue, i.e. raising taxes.

Make no mistake, I’m opposed to raising taxes and then having Team Obama waste the money … both of which are eventually going to happen.

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First, some background, courtesy of today’s WSJ:

The the budget talks are drifting in a drearily familiar Washington direction: Tax and spending increases now, in return for the promise of spending cuts and tax and entitlement reform later.

The tax increase now being touted as a sign of “compromise” … are still  tax increases, in particular on small businesses that file individual returns.

The Fortune 500 CEOs who are lobbying Republicans don’t mind because they hope to get a cut in the corporate tax rate.

But small businesses will be stuck with a huge immediate tax increase, at least until their owners can scramble to reorganize as corporations instead of Subchapter S companies or LLCs.

OK, so how to break the log jam?

Focusing on the tax side, here’s what I’d do  – a tax plan that protects small businesses (GOP goal) and soaks the rich (Obama’s focus):

1) Separate business income reported on 1040s from all other income … then cap the business income portion at 25% … allow losses to offset ordinary income.

  • Note: The system is already to set-up to handle multiple income streams taxed differently – e.g. ordinary income vs. capital gains.
  • Note: There will be a rash of LPs started to game the system … but, so what? Shouldn’t amount to that much.

2) Then, since Obama is obsessed with raising rates on “millionaires & billionaires” who make more than $250k, I would add some brackets:

  • Bump anything over $250k but less than $500k from 35% to 36%
  • Bump anything over $500k by an additional 2 points to 38%
  • Bump anything over $1 million by still an additional 2 points to 40%
  • Bump anything over $2.5 million by still an additional 2 points to 42%

Bingo … Obama gets his prized punitive rate on millionaires and billionaires making more than $250K without hurting small businesses, and there’s minimal impact on the millionaires (?) making less than $1 million.

It’s as easy as that.

Again, it’s not the way I’d attack the deficit problem, but if Obama’s bound and determined to raise income tax rates, this is how I’d do it.

Note: I must admit that I’m swayed by the inevitability of the GOP losing on this issue … and by an analysis I heard about that said that the vast majority of tax payers would be impacted live in NY, CA, NJ, MD and DC … blue states that overwhelmingly support Obama’s policies … there’s a certain poetic justice to them paying the freight.

Stay tuned for posts re: how I’d really attack the problem.

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