Absent any action from Congress, federal tax rates will get a substantial wallop Jan. 1, 2013. The top two individual income tax rates would rise from their current levels of 33 and 35 percent to 36 and 39.6 percent. Rates for investment income would rise at the same time. The 2 percent reduction in payroll taxes would end. And the estate tax would revert to 55 percent (from 35 percent) while the exemption level would revert to $1 million (from about $5 million). Happy New Year.
NRCA is part of the S Corp Coalition, which recently commissioned a study to assess the effect these tax increases would have on the business community and, in particular, small businesses. The study, conducted by Ernst & Young, concludes the cumulative effect of these tax changes would be to raise the top rate on pass-through income (experienced by Subchapter S corporations) from 35 percent to nearly 45 percent. As a result, the marginal effective tax rate on a new business investment would be more than 15 percent higher than it is now, surely a discouragement from investing in new plants and equipment.
The study also concludes the effect of these tax increases would result in a 1.3 percent reduction in output, 0.5 percent increase in unemployment, decline in investment activity of 2.4 percent and reduction in real after-tax wages of 1.8 percent.
It's hard to imagine Congress would allow all this to happen, but this is, as we know, an election year. So we're hearing the rhetoric heat up: The "rich" should pay their "fair share" despite the fact the top 1 percent of income earners pays just under 40 percent of all federal income taxes. One senator suggested letting the tax increases take effect because then the debate no longer would be about tax increases but about tax cuts.
My view is this silliness will end Nov. 7, the day after the elections. Hardly anyone disagrees the cumulative nature of these tax increases would be disastrous for a fragile economy, and neither party wants to take the blame for more economic bad news. There are reports leaders from both parties have been meeting to find agreement on overhauling the entire tax code—an action that is long overdue.
The problem, then, is time. Asking Congress to act on a significant issue in less than two months is like asking your teenage son to take out the trash: It only will happen with proper incentives. And the best incentive for members of Congress is your vote. This is a great time to let them know how you feel. An even better time is Nov. 6 at the ballot box.
Bill Good is NRCA's executive vice president.