Here is a possible compromise to the tax side of the fiscal cliff that meets the goals of raising taxes on the affluent, avoiding tax increases on the middle class and keeping the economy moving.
(1) Raise the top tax rate to 39.6 percent on taxable income above $250,000 as the president insists. However, for income earned from a flow-through entity such as Sub S corporation or a partnership that is an operating business (with employees) as well as income from a sole proprietorship (Schedule C), a maximum alternative tax rate of 35 percent would apply in order to prevent the potential harm to the economy of higher tax rates on business owners. Thus, operating business owners would not have an increase in their taxes and the higher rate (39.6 percent) would be limited to certain non-business income and salary/wages gross income.
(2) Limit the amount of total dividends and capital gains subject to the alternative lower tax rates (maximum rate of 15 percent) to the first $250,000 per year. The lower capital gains tax rate would also apply to all capital gains on sales by the original owner of a business on ownership interests held at least 5 years.
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(3) In order to encourage the growth of U.S. business operations, lower the corporate tax rate to 30 percent, tighten or end deferral for foreign earnings of controlled foreign corporations that are non-operating entities, and allow tax-free repatriation of earnings that have been subject to a foreign tax rate of 80 percent of the maximum U.S. corporate tax rate.
(4) For estate tax purposes, provide a $3.5 million exemption and have a top tax rate of 35 percent (progressive rates of 15 percent and 25 percent on estates, after exemption, less than $6.5 million — thus, only estates above $10 million will pay the top tax rate).
(5) Substantially decrease the impact of the alternative minimum tax by providing a significant increase in the exemption amount.
6) Since many small individual middle-class investors still have capital loss carryovers from 2008 and 2009, raise the $3,000 annual capital loss limitation to $15,000 per year.
D. James Tiburzi • St. Louis
Assistant teaching professor, University of Missouri-St. Louis