If the President has his way, we can call the new law…”The Export of Multinational Domiciles Law.” Forward looking multinationals that have the vast majority of their revenue from offshore business have already begun to move their domiciles. Bottom, line is that he law as it is reduces capital investment in the U.S….and the reform as proposed would accelerate that process and drive the highest paying corporate headquarters jobs offshore along with the manufacturing jobs.

The proposal that all corporations would be taxed at a minimum rate of 30% as a way of capturing the deferral under corporate law would drive multi-nationals out of the U.S.

Another proposal of the president was the ‘Buffet Tax’. Here again the President proposes a sort of new AMT so that millionaires would pay a minimum of 30% tax. This would take away any lower treatment for cap gains and dividends which are owned by the highest earners. I think most people who read these pages understand that theory of a lower rate for cap gains tax is to account for the inflation that occurs during a long term investment and to respect the risk involved in longer term investing. The dividend tax at a lower rate is to mitigate the profound overtaxing of corporate income…remember corporations that pay dividends (C-Corps) already have a top tax rate of 35% and the dividend paid to the owners are on top of the 35%…so, if the dividend is taxed at 15%…the true tax for owners of C-Corps is really 50%…it used to be 70%…this is why C-Corps have not paid a lot of intention in paying dividends and prefer to purchase their own stock instead.

The real deceit in proposing this 30% minimum tax on millionaires when you are pretending to support a renaissance in American Manufacturing is the failure to tell the truth about S-Corp profits that are reported as personal income. Most of the millionaire tax payers are really the owners of S-Corps who have to pay tax on corporate income that is passed through to their personal returns. This process starves these S-Corp enterprises of capital because the owners have to pay tax on earnings whether they distribute those earnings or not. What this means is that any money that owners reinvest in their S-Corp enterprise is on an after tax basis. The available capital to reinvest is reduced by the top marginal tax rate. The whole precept of this minimum tax is that these millionaires have earned income and that they do not ‘need’ the money. The inconvenient truth is that the successful small business owners who report adjusted gross income of over 1 million actually need the money to provide working capital and growth funds for their businesses….Consider that if an S-Corp owner reinvests 20% of the annual earnings to sustain the growth and health of the business enterprise asset…then that owner receives only 80% of the earnings…assuming a federal top rate of 35% and state rate of 7%…the owner will pay about 42% under the current code…but only receives 80% in distribution…so the S-Corp owners after tax return is only 38%…an effective tax rate of 62%!

The actual millionaires who are not S-Corp owners and who receive funds from passive investments and municipal bonds is very small and would not provide any basis to raise any real money.

If the President is serious about in sourcing jobs to America through a focus on manufacturing then he is going to have to parse out the double taxation of dividends in the C-Corp structure and penalty for reinvestment of profit in the S-Corp structure. As it is he ignores this central problem and treats these issues superficially and deceitfully.

The likely reaction to a 30% AMT for Millionaires is to cause the very rich to sell thier Municipal Bonds, defer taking capital gains, stay away from divident stocks and utilities, reduce income to what they actually need to consume and stop investing long term, invest in alternative assets…land, gold, diamonds that might hold value or move money off shore. None of these reactions would be good for the real economy and it could casue a crises for municipal finance.