Is tax policy redefining reasonable compensation?

BVWireIssue #97-2
October 13, 2010

In his recent blog post “Reasonable Compensation and Soaking the Rich,” Raymond J. ("RJ") Dragon (Rotenberg Meril Solomon) analyzes the concept of reasonable compensation in the context of a tax policy aimed to “soak the rich.”

Says Dragon:

“In my work as a business valuation expert, I have seen several cases in which a reasonable compensation analysis yielded a figure of around $250,000 for the owner.  So if the business owner made $366,400, then the remaining $116,400 of that would be the return to the owner’s capital investment.  Applying the principle of “soak the rich”, the owner would be relatively lightly taxed on the first $250,000, with the remaining $166,400 taxed at “soak the rich” tax rates of over 50% when Medicare taxes and state income taxes are added to the Federal income tax.  What results is a very high tax rate on the returns to investment capital.”

“What a reasonable compensation analysis shows is that “soak the rich” really means “heavily tax the returns on the investment capital of small business owners.”  

Read the complete blog post here.
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