The Mother of All Tax Hikes on Small Businesses

Small business is the bedrock of the American economy. Undercut it and the economy caves like a Minnesota bridge.

The Rangel tax reform bill takes direct aim at America’s job-creators. It would raise the maximum marginal tax rate on all small business income – wages, distributions, capital gains, dividends – by four percentage points (from 35 percent to 39 percent) through the creation of a new surtax applied to incomes above $150,000. Curiously, this surtax is applied to Adjusted Gross Income, not Taxable Income, so it comes before deductions. That means it is really like a five or six percent surtax on taxable income because it reduces the value the home mortgage, charitable, and other itemized deductions.

In addition to the tax rate increase, the bill also eliminates several tax provisions small businesses rely on in order to remain competitive. It repeals the hard-won domestic producer tax deduction we enacted just three years ago to help encourage manufacturing and domestic production here in the United States. It eliminates the LIFO ("last in, first out") accounting rules, so small manufacturers will now pay higher taxes when inflation increases the value of their inventories. And finally, to add insult to injury, it does nothing to prevent the expiration of the Bush tax rate cuts, which means small firms – S-Corporations, sole proprietors and others that file as individuals - will face a top marginal rate of 44 percent starting in 2011