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I don't disagree with your logic, but I think you've simply chosen a non-optimal business arrangement. There is really no reason not to form an S-Corp or an LL

I don't disagree with your logic, but I think you've simply chosen a non-optimal business arrangement. There is really no reason not to form an S-Corp or an LLC. In most cases, S-Corps are a better idea. Changing the tax code to prevent the taxing of distributions as capital gains simply amounts to raising taxes on small businesses. One could argue that there is no feasible legitimate reason for an s-corp smaller than 3 employees, but one could equally argue that there is no reason to cap the payroll taxable income or that there is no reason to collect payroll taxes from young people who will surely never benefit from Social Security 50+ years from now (the program will likely be pure welfare by then which removes the justification for the regressive payroll tax to fund it).

tptacek 16y ago
You mean, apart from the fact that (a) the money you're "saving" on taxes can be taken from you with gigantic penalties by the IRS at any moment, because the tax courts apparently unanimously consider any compensation for services related to your employment a "wage" which is subject to FICA and FUTA, and (b) taxing all small businesses consistently lowers the long-term burden paid by the world's LLC's, sole proprietorships, LLP's, and C-Corps, all of whom are currently making up the shortfall of the people playing games with their S-Corporations. That's what you meant, right? =)
- grandalf 16y ago
  Making up a shortfall? You're under the impression that if there were better enforcement of shady S-Corps there would suddenly be a law lowering taxes on the other types of business orgs?
  - tptacek 16y ago
    I'm saying that there is some function mapping revenue to entitlement obligations, but I'm not interested whatsoever in arguing the merits, accuracy, or impact of that function. Most "small businesses" are not S Corporations. An even smaller number are S Corporations that have been jiggered to allow owners to avoid FICA. And only fraction of the people employed by small businesses could ever take advantage of the loophole, since it's effectively usable only by owners.
    - grandalf 16y ago
      Why should founders pay payroll tax on the firm's entire gross income up to the cap? That does not make any sense to me, since the founder already pays self-employment tax on whatever amount he/she takes as salary.

tptacek 16y ago

You mean, apart from the fact that (a) the money you're "saving" on taxes can be taken from you with gigantic penalties by the IRS at any moment, because the tax courts apparently unanimously consider any compensation for services related to your employment a "wage" which is subject to FICA and FUTA, and (b) taxing all small businesses consistently lowers the long-term burden paid by the world's LLC's, sole proprietorships, LLP's, and C-Corps, all of whom are currently making up the shortfall of the people playing games with their S-Corporations. That's what you meant, right? =)

grandalf 16y ago
Making up a shortfall? You're under the impression that if there were better enforcement of shady S-Corps there would suddenly be a law lowering taxes on the other types of business orgs?
- tptacek 16y ago
  I'm saying that there is some function mapping revenue to entitlement obligations, but I'm not interested whatsoever in arguing the merits, accuracy, or impact of that function. Most "small businesses" are not S Corporations. An even smaller number are S Corporations that have been jiggered to allow owners to avoid FICA. And only fraction of the people employed by small businesses could ever take advantage of the loophole, since it's effectively usable only by owners.
  - grandalf 16y ago
    Why should founders pay payroll tax on the firm's entire gross income up to the cap? That does not make any sense to me, since the founder already pays self-employment tax on whatever amount he/she takes as salary.