Monday, July 9, 2012

Obama's Tax Plan Would Raise Taxes on 900,000 Small Businesses

ABC News committed a random act of journalism today.  Don't tell Obama, he's likely to take it out on his Special Assistant who just happens to be the wife of ABC News' president Ben Sherwood:

13 comments:

Anonymous said...

If Americans want the present level of services continued, including foreign aid and overseas adventures, then they are going to have to pay up. So far Americans seem to want to keep the current level of spending and show no signs of wanting to scale back foreign aid and military spending either. So taxes need to be raised. It is really quite simple.

Anonymous said...

So if 894,000 is 2.5% of all small businesses that means there are around 35 million small businesses in the country.

According the the SBA (http://web.sba.gov/faqs/faqindex.cfm?areaID=24) most of those small businesses have NO employees. My guess is that most of the businesses seeing tax increases fall into that category and are really more accounting tricks than actual small businesses.

theKansasCitian said...

Nice try.

While it is true, 78.8% of business have no employees, the average gross sales for those business is just $45,000. Those 78.8% of small businesses with no employees also only account for 3.2% of all sales in the country. When you look solely at the remaining 21.2% of businesses, the average number of employees jumps to 20 per business, according to the same SBA data.

Since the businesses (S corps, LLC, and sole proprietorships) that would fall into the tax bracket that would be hit by the Obama tax increases have to earn $250k or more, it's safe to say they the overwhelming majority will have employees.

Anonymous said...

Why are you talking about sales instead of income? A lot of people who earn money through investments have "small businesses" on paper. I think they are the ones that will be hit by the tax increase since they have very large incomes (though tiny sales).

theKansasCitian said...

Sales are income before taxes and amortization for a business. The income generated from the business will always be less than sales. See: http://smallbiztrends.com/wp-content/uploads/2010/11/scorp-500.jpg

You can't have any business income without gross sales. A business that has 0 or negative income will pay no income taxes.

The figure is 2.5% of businesses will be hit by the tax increase, not 2.5% of people who own businesses. In order for the business income to be hit by the tax there has to be positive business income.

Capital gains is what people earn from investments. That is taxed at a separate rate than business and wage income.

Here's an example, and I know because I owned an operated a Sub Chapter S corporation for years:

John Doe makes $100,000 per year as CEO of XYZ Corp.

XYZ Corp has net income of $50,000. Because of S Corp rules this amount of net income flows to John Doe's personal taxes, raising his income to $150,000. This puts him in Obama's new 39% tax bracket.

However, John Doe only received $100,000. The remaining $50,000 he never received. In fact, it is likely money that doesn't even exist, more on that later. Now in the new tax bracket John Doe has to pay 39% of 150,000 in taxes, a total of $58,500. As previously stated, he only earned $100,000 in wages. This leaves him with just $41,500 to cover his personal expenses for the year, car, home, health insurance, etc.

In most cases, John Doe won't have the money to cover that tax burden. He'll have already paid some through normal FICA deductions, but he will need to make up the rest, $19,500. This will either need to come from the business or from his savings, if he has any. Most small business owners are up to their ears in debt, so he doesn't likely have any savings. So he is going to have to pull this money out of the business, that's money that could have gone into investing in business expansion or hiring new people.

Now, let's go back to why the $50,000 figure may not even be real and why the business may not have the $19,500 in cash to cover that expense. The reason is simple, depreciation. When a company buys capital equipment, furniture, computers, etc. they don't get to recognize it as an expense at the same time they purchase. Instead, it must be written down over a period defined by the IRS. So, let's say XYZ Corp bought a new service truck for the company. The cost to the company was $20,000. That means the company spent $20,000 in cash, but they will only get to deduct one fifth of that on their taxes, $4,000. So while income is $50,000, in reality, it's $16,000 less than that from just this one purchase. Then lets assume the company borrowed money to start. Only the interest from those payments are written off as an expense, the principal is not. Let's just assume the company made payments on the loan of $18,000 or $1,500/month, which is on the low end for most businesses. Now you can see they real cash flow from operations is $34,000 less than what the IRS says is the businesses income.

John Doe needs to come up with $19,500, but after the $50,000 net income and adjustments for cash flow, he only has a net gain for the year of $16,000. Where does he come up with that extra $3,500?

For this year he is going to have to borrow or delve into his or the companies savings. In the next year he is going to have to cut expenses, which means laying people off, or making less investment in the business, which hurts other businesses.

This simple little tax increase that supposedly only affects the rich creates a domino effect that spreads throughout the economy.

Anonymous said...

You clearly don't understand how marginal taxes work. You don't pay your top rate on all of your income. You pay it on the income of that bracket. So if the 39% kicked in at 150k then you would pay 39% of all the money earned OVER 150k.

Anonymous said...

You seem like a very clever individual but so many of your "explanations" are riddled with inaccuracies or downright falsehoods. Who are you trying to fool?

theKansasCitian said...

You are correct. I used the marginal rate as the effective rate in my example. That was a simplification on my part to show the math behind how businesses will be effected.

The effective rate on the amount in my example would be 29% under the 2011 taxing rules. Under Obama the current tax bracket would be modified to make any amount over 150k (which decreases the entry into the second highest tax bracket) to be taxed at 36% and $379k at 39.6% for single payers, also used in this example for simplification.

However, my example, although slightly off still holds true. It was given as an example of the 900,000 small business you claim have no employees and make no money and how the Obama tax increases will effect them.

So just change the numbers slightly. Let say the business shows net income of 100,000. Bringing an additional 50k to the new higher tax bracket. You are now at an effective rate of almost 32%.

The same issues and problems still occur. Business net income is not the same as net cash flow. The business may show a gain that does not exist because of other expenses like principal loan payments and capital purchases.

To try an allege these 900,000 businesses will not be hit with a higher tax burden that will affect their purchasing and hiring is totally inaccurate.

theKansasCitian said...

On the flip side, it appears you are quite knowledgeable about how tax rates work. Yet, you seem willfully ignoring data and information about who and how those tax rates will impact businesses. Who are you trying to fool?

Anonymous said...

I would also like to see some sourcing of your allegations. From everything I've read the higher rates would apply to single filers making $250k and more not $150 as you have claimed time and time again.

Anonymous said...

The 250k figure is for married filing joint . The 150k is for single filers.

theKansasCitian said...

"They are right to be concerned. According to calculations by The Heritage Foundation’s Center for Data Analysis (CDA), the average American with $250,000 or more in income can expect an average $24,888 tax increase next year under Obama’s proposed policies.
The $24,888 figure is often enough for a salary, and despite what some proponents of the tax hike have argued, many of these successful small businesses do have employees. According to the Treasury Department, 1.2 million small businesses both had employees and earned more than $200,000 in 2007. So the President is putting about 1.2 million jobs—perhaps even more—at risk with this tax hike."

http://www.foundry.org/2012/07/13/obamas-small-business-tax-could-average-25000/

theKansasCitian said...

"According to the Treasury study, out of 34.8 million tax returns that claimed flow-through business income, 4.3 million employed workers in 2007 (the most recent year for which data are available). The more than 30 million returns with business income (88 percent of the total returns with business income) that did not qualify as employer-businesses are those individuals earning business income from side jobs.

It is those 4.3 million employer-businesses that matter most when it comes to determining the impact that President Obama’s tax increase would have on job creation. The Treasury report shows that 1.2 million, or 28 percent, of them earned more than $200,000—the income threshold over which President Obama’s tax increase would apply. More important as it pertains to job creation, those 28 percent of businesses earned almost all—91 percent—of the income earned by flow-through employer-businesses."


U.S. Department of the Treasury, Methodology to Identify Small Businesses and Their Owners, August 2011, Table 15, http://www.treasury.gov/resource-center/tax-policy/tax-analysis/Documents/OTA-T2011-04-Small-Business-Methodology-Aug-8-2011.pdf (accessed April 19, 2012).