EXPERT ADVISORY: Fiscal Cliff Solution

By Cassie Williams Jones

John Everett, Ph.D., professor of accounting in Virginia Commonwealth University’s School of Business, is available to discuss a proposed solution for the looming fiscal cliff.

The MAXTax plan, developed by Everett and three other professors across the country, proposes capping the tax on small business owners at a 34-percent rate, equivalent to the corporate tax rate. In analyzing IRS data, the authors discovered that business income appears on more than 50 percent of taxable returns for taxpayers with incomes exceeding $250,000, and accounts for approximately 25 percent of total income.

As part of the compromise, and to reduce the impact of the MAXTax on the federal deficit, the authors propose broadening the definition of self-employment income for employment tax purposes to include all non-separately stated income of certain partners and S corporation shareholders.

“The plan we constructed satisfies both sides of the political aisle,” Everett said. “It takes from the Republican viewpoint to not penalize small businesses with sole proprietorship, partnership or S Corporation business income, but also appeals to Democratic ideology by increasing taxes on the wealthiest Americans to pre-2001 levels.” 

The tax rate on active business income would be capped at 34 percent up to $10 million, which is also the cap on the 34 percent rate for corporate taxable income. Providing a lower rate for “earned” business income is not a new idea; in the 1970s, such income was taxed at a 50 percent rate, while the maximum rate on “unearned” income (interest, dividends, etc.) was 70 percent.

The fiscal cliff, if not resolved by Dec. 31, will dramatically impact the U.S. economy. Everett and his research colleagues hope to impact the resolution with this proposal.

The details of the MAXTax plan will be published in the publication Tax Notes.

Everett is an expert in the areas of taxation, tax policy issues and computer solutions to tax planning problems. He is the author of more than 100 articles in professional and academic journals and six textbooks. He was selected the 2007 Tax Educator of the Year by the American Taxation Association.