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.