Big business screws small business to get lower corporate taxes

Kimberley Strassel:

Were the Hollywood academy to hand out Oscars for roles in this fiscal cliff drama, the winner of the Best Charlatan award would not be in much doubt. Corporate America, take your bow.

Say this for the Republicans and Democrats: Both sides are fighting over principles. Nothing so generous can be said for the bulk of America's corporate chieftains, whose agenda lately has been to stick it to everyone else.

As the negotiations have rolled on, a growing collection of CEOs and big-business lobbies have fallen in line with President Obama's cry to raise income taxes on those making more than $250,000. To listen to these CEOs, this is the ultimate self-sacrifice. "I would pay more in taxes" in a budget deal, explained the noble Honeywell CEO Dave Cote, but it would be worth it to "put the economy on a sounder footing."

We'll see how much more Mr. Cote's personal accountants ultimately allow him to pay. Meanwhile, the virtuous poses appear to be cover for a bigger game.

The Business Roundtable let the cat out of the bag on Dec. 11 when it circulated a letter signed by 150 of its corporate titans sanctioning year-end income-tax hikes. The letter happened to appear a few hours after the White House leaked its offer to include corporate tax reform as part of any cliff deal. The reform, in theory, would lower corporate tax rates.

Put another way, the Roundtable saw an opportunity to make the one million small American business owners who pay individual income taxes shoulder a big rate hike (up to 39.6%, from 35%) while radically lightening the tax load for the Roundtable's own corporate behemoths (to 28% from 35%). Any corporate tax reform hinges on closing "loopholes" to pay for a lower corporate rate. Small business owners would lose tax perks along with everyone else—meaning they would pay even more—but they would not benefit from lower corporate rates.

"Everybody's got to feel a little bit like they're getting nailed," Jim McNerney, the chairman of both BoeingBA +0.91% and the Roundtable, said of the lobby's cliff-deal position. He neglected to note that those getting "nailed" most emphatically would be Mom & Pop America.
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I think what small business people will do is incorporate.  They will pay themselves a salary at the highest amount not subject to the increased tax rate.  They will leave the rest of the profits in the corporation to plow it back into the business.  While the Democrats can still plug things into the tax code to make this strategy unprofitable, it is possible that the treasury would get even less revenue until the business owner pays himself a dividend or gets a capital gain from selling the business.

Tax accountants may come up with other creative ways to avoid the high tax rate.  It is unfortunate that Obama is pushing small business into the tighter grips of accountants and lawyers instead of allowing them to grow their business more.