Following his election victory, President Obama is adamant that the tax rates need to be raised on the wealthiest Americans.  The Republicans, on the other hand, insist that raising rates will result in the loss of 700,000 jobs.  I am proposing a compromise solution that seems so simple that I am surprised that no one has suggested it.  I have, in fact, sent it to President Obama, our Senator Nelson, John Boehner, Bob Corker, Paul Ryan, and the Naples Daily News but so far have received no response or acknowledgement (other than the standard replies you get when you write to your congressman).  I am thus compelled to publish it on my own web blog.

First of all, I don’t necessary believe the Republican argument that increasing the marginal tax rate on the wealthiest taxpayers to 39.6% will either cause our economy to collapse or that it will lead to the number of job loss that is commonly cited.  I also feel, however, that the Democrats have not been creative enough in countering this argument with a proposal of their own.

The compromise solution that I am proposing is to raise the marginal tax rate on income over $250,000 ($200,000 for single taxpayers) back to the 39.6% rate prior to the Bush tax cuts as President Obama advocates (and the polls indicate that the majority of voters accept), but with one important exception: self-employed income.  I would suggest actually decreasing not only the top marginal rate on this type of income, but also decreasing rates on self-employed income across the board.

The idea is to implement a separate tax schedule for Business Income on the personal Federal Tax Form 1040 (Schedule C or C-EZ).  Business income (which is basically sole proprietor and other self-employed income) is currently taxed at the same rate as wages and salaries and all other income (except for dividends and capital gain income).  Why not introduce a separate tax schedule for this type of income with lower rates.  This would surely help open up the acceptability of increasing the top marginal tax rate on wages and salaries and other income to the suggested 39.6%.

In addition to income derived from sole proprietor businesses, business income on line 12 of the 1040 also includes consulting income, babysitting income, and any other income received by many individuals as “independent contractors.”  Individuals receiving this type of income also pay almost 15% (temporarily reduced to almost 13%) of their income as self-employed Social Security Tax, so they are paying some of the highest taxes of anyone. (I would even go so far as to suggest making the first $1,000 of self-employed income exempt of the burdensome Social Security tax).

Self-employed and sole proprietor income should be embraced and encouraged as individuals who earn it are, in fact, working in the spirit of entrepreneurship and they do, on many occasions, employ other individuals.  High levels of wages and salaries (including bonuses sometimes in the millions of dollars) and other income such as pension distributions, on the other hand, do not seem to be redistributed into the economy quite as quickly and don’t necessarily lead to job creation.  The primary argument against raising taxes on the highest earners should not hold water if the rates on business income filed on a personal return is reduced.

A further argument in favor of this approach is that most everyone (President Obama, Mitt Romney, and Paul Ryan included) seem to agree that the corporate tax rate (currently 35%) should be reduced to somewhere in the twenties.  To me it wouldn’t make sense to substantially reduce the corporate rate without making a similar reduction to self-employed and small business income.

One of the objections to my proposal could be that it complicates an already complex tax code.  I would argue that we already have a separate tax schedule for qualified dividends and capital gains, so it shouldn’t be that hard to either implement the separate tax calculation on this type of income or figure it when completing a 1040.  Perhaps the tax calculation could be integrated into Schedule C or C-EZ and added on at the end of the 1040.  In any event, most self-employed individuals already have access to either computerized tax programs or paid tax preparers.

I do not know the potential impact on revenues for such a solution but it should have less impact than renewing all of the Bush tax cuts.  The revenue lost on reducing the tax rate on self-employed income could, perhaps, be made up by the closing of other loopholes as suggested by the Republicans.

Please, let’s get a lot more creative to solve this tax impasse!  To just dig in with current positions on both sides of the aisle just causes us to lurch from one crisis to another with no real solution other than “kicking the can down the road.”  The solution I have proposed seems to me to be a reasonable compromise that would actually help the economy.