Democrats' New Tax Plan Targets Private Corporations, Their Owners

WASHINGTON — First it was people earning at least $1 million a year. Now Democrats seeking their next election-year target for tax increases on better-off Americans have found it: the owners of many privately held corporations.

Senate Democrats introduced legislation Tuesday that would prevent student loan interest rates from doubling this summer. Its $5.9 billion cost would be paid for by making it harder for owners of so-called S corporations to avoid paying Social Security and Medicare payroll taxes on some of their earnings.

The proposal would affect such companies with earnings of at least $250,000 annually and whose revenues come from the work of three or fewer owners. It would also apply to some lawyers, doctors and other professional service businesses that are owned by partnerships.

House Democrats said late Tuesday that they would introduce a similar bill, also financed by boosting payroll tax collections from many private companies' owners.

The Democratic tax plan, which has been under discussion among congressional and Obama administration aides, would tighten the definition of S corporation income on which payroll taxes must be paid. The idea was already eliciting Republican opposition, but Democrats believe there would be political value in forcing GOP senators to vote on the measure, win or lose.

"I'm not really interested in any increase in taxes," said Rep. Tim Scott, R-S.C.

S corporations are a widely used way of forming businesses, commonly used by many professional service practices like doctors and lawyers, as well as by construction, retail and real estate companies. There are more than 4 million of them in the United States. They are named after the subchapter of the tax code that defines them.

A 2009 report by the Government Accountability Office, an investigative agency of Congress, estimated that in 2003 and 2004, shareholders of S corporations underreported wages by nearly $24 billion, "which could result in billions in annual employment tax underpayments."

By law, S corporations are not publicly traded. They may have no more than 100 owners, but the overwhelming majority are owned by just a small handful of people: 6 in 10 have a single shareholder and more than 9 in 10 have three or fewer, according to that same Government Accountability Office report.

Democrats believe the proposal could feed their campaign push for tax equity, just like the "Buffett rule" vote they forced in the Senate last week and lost, which would have required people making $1 million annually to pay a minimum amount of federal income taxes. They cite reports that drew attention to two politicians using S corporations as tax shelters: former Republican House Speaker Newt Gingrich, who has challenged Mitt Romney for their party's presidential nomination, and former North Carolina Sen. John Edwards, who contended for the 2008 Democratic presidential nomination.

Republicans said that while instances like Edwards' use of an S corporation to avoid paying payroll taxes deserve scrutiny, they think the Democratic strategy will backfire.

"It would be mystifying if Democrats chose to make the price of doing business for America's small businesses more difficult with our economy as weak as it is," said Antonia Ferrier, spokeswoman for Sen. Orrin Hatch of Utah, top Republican on the Senate Finance Committee.

Brian Reardon, executive director of the S Corporation Association, said the Internal Revenue Service already has the ability to pursue people who don't pay the taxes they owe. He said he believed the Democratic plan would be "less workable, less enforceable" than existing rules.

S corporations do not pay corporate income taxes. The company's earnings flow through to their owners, who include them in the individual income taxes they pay.

But those owners only have to pay Social Security and Medicare payroll taxes, which this year are 5.65 percent for workers and 13.3 percent for self-employed people, on company earnings that they declare to be their salaries. They owe no payroll taxes on the part of their compensation that they consider to come from their firm's profits.

The IRS says S corporation owners must consider a reasonable portion of their earnings to be salaries, but there have been disputes over how to interpret that.

A similar proposal by Senate Democrats went nowhere in 2010. This year Rep. Pete Stark, D-Calif., introduced a similar bill that has languished in the GOP-run House.

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Comments

[johnrandall]

05:47 PM on 04/24/2012

Name the last Republican President to balance the budget.

[AveragePlayer]

05:34 PM on 04/28/2012

Sure.. Dwight Eisenhower, who was President in 1957 which is the last year in which the US had a balanced budget.

http://www.geldpress.com/2008/07/us-budget-reporting-deception/

[Azlegit]

03:12 PM on 04/24/2012

Democrats target anybody with a buck so as to continue their wasteful ways that will sooner than later bankrupt this country.

[Frank Padia]

01:31 PM on 04/24/2012

Heres a thought... instead of trying to find more people to tax, why dont the Dems simply stop trying to spend money they do not have? The Democrats just dont seem to understand they cannot simply tax whomever they decide is "too wealthy" to pay to help who they decide is "too poor" Evnetually, everyone will be poor. Who will they tax then? Every household in this country is forced to live on a budget. It is high time we demanded that Congress do the same. The Left wants to constantly attack Paul Ryan for his budget proposals but I have yet to see a single budget come from the Dems in either the House or Senate. The only "budgets" offered by the Dems were two from the President that failed to get a single vote from either party. You can blame the GOP, but the truth is beginning to shine through and even moderates on the left are about sick of the political games.

[To Tall Jones]

02:38 PM on 04/24/2012

@Frank Padia...Because its not their MO (modus operandi) they wouldn't get the votes from the people they are giving our money to, so, their motto is spend and tax, forget about cutting...

[LunaNik]

03:08 PM on 04/24/2012

The Progressive Caucus' budget was lauded by the CBO. It didn't even make it to the House floor. Perhaps that's why you didn't "see" it. It was quite brilliant. You should read it. It would have reduced both debt and deficit, provided needed funding to necessary programs, and increased revenue. The GOP didn't like it because it increased taxes on the wealthy and on corporations.

Apparently, you are unaware that there is a distinct class that is not even remotely "too poor" to pay taxes. We've all been calling them the 1%. Does that ring a bell? They presently own the bulk of the wealth in the country, thanks to 30 years of Republican supply-side economics. We'd like them to pay their fair share according to a progressive income tax code which is manifestly fair since they utilize a larger proportion of government services in acquiring and maintaining their wealth.

[tmmacdon]

07:39 PM on 04/27/2012

Haha well that's a good try there @LunaNik, but unfortunately the Progressive Caucus budget is a bunch of garbage. It's just an extension of Obamanomics, but adding 50% tax rates on the rich. Anybody that has true economic wisdom will tell you that tax increases are a viable option in helping with the debt crisis. But a tax increase like this would devastate an already stagnant economy. The biggest blow would be to small businesses, hindering market competition and pricing. Not to mention the fact that America would attract zero foreign investment. No entitlement reform and an increased commitment to a culture dependent on hand-outs would significantly weaken the middle class. This actually give people a negative incentive to prosper! Why would anyone want to move from a 30% tax bracket to 50%???
But all of this is fine because the progressives will use their secret weapon of government job creation! Pair that with some government targeted green energy and education investment and you've got a real winner on your hands! Does any of that sound familiar? It might because Obama has been trying this method for four years with absolutely no success. When progressives learn that the economy is based on incentives driven by a MARKET is when this country can begin a true recovery. The government cannot create jobs because the government is people and people are corrupt, so it should never be used to replace a free-market goal.

[emmanuel kalu]

12:36 PM on 04/24/2012

it is time we reform most of tax code, to ensure that everyone is paying their fair share. this would yet again fail, by the hands of the republicans, who continue to make sure the rich get away with not paying their fair share and passing the burden to workers. however dems have to be sure to frame the debate correctly. any saving, or tax revenue should be divided in half, half toward paying down the principal debt and half going toward creating meaningful jobs like infrastructure jobs. if they do that, the republicans would be hard press to call this move another tax and spend. we really need to invest in our economy, while paying down debt. a perfect investment would be to build out our natural gas fueling stations. this would create jobs for construction workers, reduce our need for imported oil, increase the price of natural gas, which also would create jobs, and reduce energy cost for trucking companies, another thing that would create jobs.

[jerrym930]

11:47 AM on 04/24/2012

Demo crats are not just going after S-Corps. They will be proposing taxing 401Ks and IRAs also. The question is, will they wait until after the election, so as not to piss off voters.

[emmanuel kalu]

12:44 PM on 04/24/2012

where is your facts to support that statement.

[fisherdude1969]

11:36 AM on 04/24/2012

"Raise taxes on the rich!" "Raise Taxes on Big Business!" "Raise Taxes on Small Business" "Create Thousands of New Regulations!"

"Give 3 Years Worth of Checks to Welfare Mothers for Each Child They Have!!!"

Hey! Where are all the jobs and why is our deficit so high?

Why would anyone take a liberal seriously anymore and why would anyone trust them in government?

[MtnGeek]

12:18 PM on 04/24/2012

Were you in a coma for the Bush years? The tax breaks for the rich, running two unnecessary wars on credit and an economic disaster that is still affecting global economies ... do you remember all of that? Bush did that. Obama and whoever wins the next election will be continuing to clean up Bush and Co.'s mess.

[emmanuel kalu]

12:39 PM on 04/24/2012

i am sure you are selecting forgetting the reasons why we are in this mess. our tax code is completely bad, yet republicans gave a massive tax cut to the rich and would not allow corporations to pay their fair share. republicans even block cutting govt tax expenditure. how about those wars that we borrowed money for and made defense contractor billionaires. how about the huge give away to pharma, how about all the deregulation that destroyed our economy and people lives, not to mention their small wealth.

[To Tall Jones]

02:47 PM on 04/24/2012

@emmanuel kalu...I don't think hes forgetting anything. The Democrats not only caused the housing crash they facilitated it and that is what brought our entire economy down.

[To Tall Jones]

10:30 AM on 04/24/2012

I'm small business owner and an S corp, our business makes less than 100k per year, my wife and I are the only employees of the company. After all is said and done at the end of the year we make a modest salary (maybe 40K between the both of us) and we pay payroll taxes such as unemployment and federal etc. I don't understand why Obama the Democrats want to punish the people who are killing themselves trying to make a living. I feel like we're constantly under assault by the government. In 2010 we were able to have some kind of deduction for small businesses, but our accountant said the feds took the deduction away in 2011, we wound up paying more in the 2011 tax year because we didn't have the deduction anymore. Now it appears they want even more money. Quite honestly, I don't see how anyone would want to open a small business today, especially knowing what I know.

[fisherdude1969]

11:31 AM on 04/24/2012

Thank you for your post. You live in the real world. Now prepared to get attacked by the liberals on this site who know so much more than you.

[emmanuel kalu]

12:42 PM on 04/24/2012

did you read the article, it says those making about 250k. i am pretty sure that you would not be included. now compare your small business with that of Newt, or those lobbying firms. There comes a time, when people really need to understand what is being proposed and stop fighting against their own interest. it is just like the tax on millionaires, that tax would be on any dollar after a million dollars. yet people making 40k 50k or less were fighting against their own interest. if Mitt doesn't pay, you would have to pay, because you don't have the resources to game the system.,

[To Tall Jones]

02:17 PM on 04/24/2012

@emmanuel kalu...Yes I read the article. They say the road to hell is paved with good intentions. Someday, my business could be making 250k (wishful thinking I know) and that means it will affect me as well. Also, in a couple of years the Democrats will want to tax the businesses that are making less than 250k, it always starts off like it does not affect some businesses, until, they want more, then they'll introduce a new tax that will affect businesses like mine too. The Democrats never met a tax they didn't like so they can give the money to someone else, but heaven forbid they had to pay it themselves, the world would be coming to an end.

[Chase Chevalier]

09:32 AM on 04/24/2012

Wait I am confused about something. Since when do the Democrats ever put one of their own on trial for breaking the law? Heck if this is the case the whole of the Democrats in the Senate and Congress may soon be in lockup. Wait, I forgot that Obama is the President. No chance of that happening. You can't run lead a corrupt organization without the organization can you? Oh well.

[SpeakupNation]

10:25 AM on 04/24/2012

You should buy a clue. You're all over the place...kind of like Willard.

[Chase Chevalier]

02:06 PM on 04/24/2012

Dear subscriber I will lower my comment so it doesn't fly over your head. Mr. Edward is the Dems "sacraficial lamb" when in fact corruption is rampant in the Dem party. Yes also in the Rep party. That is politics!

[To Tall Jones]

11:20 AM on 04/24/2012

@Chase Chevalier...As a small retail business owner I feel like we are always being "targeted" for some king of new tax. As it stands right now we actually paid more in taxes in the 2011 tax year than we paid in 2010 because the fed took a deduction away that we had in 2010. Now, because Edwards might have done something unscrupulous the Democrats want more money from small business owners? My wife and I are the only employees of the company, we make a modest salary (maybe 40k between the both of us) after deducting expenses, we pay payroll taxes on our wages. I really don't see how punishing small business owners are going to help Obama and the Democrats garner more votes.

[ssspitz]

08:07 PM on 04/24/2012

This is the second time you posted an allegation of a tax deduction (presumably federal income tax) that was taken away for the 2011 year. Your post would be much more valuable if you were to identify that deduction. Until you do, you are taking a chance at being identified as a possible deceiver.