Monday, December 6, 2010

The Democrat's "middle class tax cut" is a populist red herring

I want to make my priorities clear from the start. One: middle class families need permanent tax relief. And two: I believe we can’t afford to borrow and spend another $700 billion on permanent tax cuts for millionaires and billionaires.

That is a line from President Obama’s weekly radio address last week. He’s referring to the coming tax hikes as the Bush Tax Cuts are due to sunset on December 31st. Interestingly, the reason the sunset provision is there in the first place is because Tom Daschle, (the then Democrat leader in the Senate) threatened a filibuster without it. That phrase tells you everything you need to know about President Obama’s sincerity when he talks about putting jobs and the economy first.

On Friday the unemployment numbers came out and the rate had crept back up to 9.8% as employers added a mere 39,000 jobs in October. At the same time President Obama and the Democrats are seeking to extend unemployment benefits beyond the already unprecedented 99 week limit. Ninety-nine weeks! That is two years of receiving a government check for doing nothing. (That doesn’t’ mean that unemployed people are literally doing nothing, but by definition they are not working.) I’m not sure how long it takes to develop a bad habit, but two years is probably a pretty good start. That causes one to wonder what is the bad habit forming effect of a government check on someone who has been receiving welfare for years…

Back to the Democrat red herring. As President Obama’s words demonstrate, the Democrats are seeking to manipulate the conversation using populist rhetoric to demonize the rich. At the core of their “solution” to our financial problems is their effort to raise taxes on the “millionaires and billionaires” while giving the middle class a tax cut. Republicans are fighting this effort, suggesting that doing so will harm job growth. The GOP position is based on the fact that small businesses are the engine of the American economy and create three out of every four new jobs in the country. That’s relevant because most small businesses owners file their taxes using personal income tax returns… and those are where the taxes are going to go up. Here are the numbers for the top two tax brackets:

For those in the second highest bracket – families with income between $171,851 and $373,650 – their tax bill is going to increase by ten percent as the rate moves from 33% to 36%. For those in the highest tax bracket – families with income above $373,650 – they will see their tax bill rise by 13% as the rate jumps from 35% to 39.6%.
Democrats are quick to point out that only 3% of small business filers are subject to the two highest tax brackets. That is true. Most small businesses are sole proprietorships where the business in question is a side venture to supplement income. Think of someone who sells comic books on eBay, dabbles as a real estate agent or designs websites on the side. What is far more important however is that while only 3% of small businesses are subject to the highest tax rates, the businesses that make up that 3% represent 44% of all small business income. Let’s do a little math problem:

IF: Small business represents over 75% of all net new job creation in the Unite States;
AND IF: 3% of small businesses generate 44% of all small business income and a similar number of jobs;
AND IF: Democrats want to raise taxes on the small businesses that fall in that 3%;
THEN: Democrats want to raise taxes on companies that are expected to be responsible for 33% of all new jobs.
That simple problem tells you everything you need to know about President Obama and the Democrats. Despite their rhetoric about wanting to put people back to work, they simply don’t care about actually creating jobs and growing the American economy. If you need even more proof, consider the coming tax hike on dividends. Dividends are currently taxed at 15%. On January 1st the dividend tax rate will skyrocket to 39.6%. (Oh, and don't forget the ObamaCare 1099 fiasco that will hammer small businesses) So, not only do we have Democrats seeking a direct tax increase on the small businesses who are supposed to create one third of all new jobs, at the same time they are discouraging investment in companies that are successful enough to be able to pay dividends at all… many of whom probably have and hire employees.

President Obama and the Democrats, in using the red herring of “middle class tax cuts” to pander to their progressive base are willing to sacrifice jobs and job creation so they can further cripple capitalism and push even more Americans into the fold of government dependency. As the economy slows and jobs evaporate expect Democrats to seek to extend unemployment benefits to 129 weeks then perhaps 159 weeks and then maybe be made permanent. At the end of the day that is exactly what Democrats want… they want to take everything the rich have stolen from the poor and the middle class and simply redistribute it. That of course is a house of cards as the rich have options about where they invest their money and even where they live or start their businesses. At some point when everyone becomes a ward of the state there is no one left on the other side from whom the state can take everything to support itself that house of cards will eventually come crashing down. Hopefully 2012 will usher in some new homebuilders.

8 comments:

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  2. VInce,

    Here is a response from a friend of mine. Give me your thoughts:

    ) "Small" businesses as defined by the government are not necessarily small. A coal mining company that employs 450 people is considered "small". A construction company that receives $30 million a year in gross income is considered "small". So some of the "small" businesses that Mr. Coyner defends are in fact quite large, especially the three percent of owners who fall into the top two brackets.

    2) Job growth is conversely linked to a "small business" owner's personal income. Wages paid to employees generally fall under the cost of goods sold and therefore deductible as a business expense for the business owner. Therefore any job creation reduces the personal tax liability of the business owner. Also, most "small businesses" are incorporated, and therefore the income reported by the owner is specific compensation that he receives from his company. Bottom line, if a "small business" clears $750,000 and the owner uses $600,000 to create jobs, his personal liability is only $150,000. He only gets taxed more if he keeps the money and doesn't create jobs. So the idea that increased personal taxation hurts job creation is patently false.

    Furthermore, if "small" businesses are the engine of the American economy, our unemployment rate would indicate that the engine needs to be overhauled. Considering that extending the tax cuts preserves a status quo that is unsatisfactory, perhaps our country is placing too much of a burden on "small" businesses?

    Joel

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  3. 1) Joel, he is correct… but it’s a red herring. Small businesses are not all small. Small is relative. When the government defines small businesses, they are comparing 400 people companies to companies like GE, Wal-Mart, Publix and others that employ tens of thousands. Sure, a 400 person business is not a buy in his basement, but it’s not a giant at all. Nonetheless, 75% of new jobs are generated by companies with 0-500 employees.

    2) Actually, job growth is directly linked to a small business owner’s personal income. As an example, let’s assume a business earns $1 million a year. The profit margin for that company is, say 10%, which means that he has revenue of $10 million and incurs costs of $9 million. The owner reports that as income and with a tax rate of 35% pays $350,000 in taxes and keeps $650,000. So for this businessman, he puts 6.5% of his company’s revenue into his pocket…

    The next year his tax rate goes to 39.6% so if his company did the same business he would take home $604,000… Now he puts only 6.04% of his company’s revenue into his pocket.

    Given that fact, if the businessman wants to keep the same income as the year before his company now has to do $10,761,589 in business. Understanding that he has $9 in costs for every $10 he generates in revenue (usually spent before hand) he has to decide if he wants to take the additional $685,480 from somewhere (savings, get a bank loan) in order to just break even at the end of the day. So the bottom line for the business owner is what is the best use of his money? Does he want to put that $685,000 into his business (much of which might be to hire employees) to earn the 6.04% he will this year (assuming everything went as well as last year) or does he want to put it to work somewhere else like the stock market, or just spend it on gambling or invest it in some country where there are lower taxes. Bottom line, does he want to find and tie up and additional $685,000 in his business in order to make up for the extra $46,000 the government is going to take out of his pocket this year?

    At the end of the day it’s all about choices. For some small business owners earning 6.04% on sales is worth the effort. For some anything below 6.5% is simply too low. Still for others, they require 10% and if they can’t get it putting that money into their business they will put it somewhere else, which may or may not generate jobs.

    If you’re not sure about the logic of this, imagine you want to sell your house. You know that if you finish the basement you can sell it for $25,000 more than you can today. Let’s say the profit margin on finishing a basement is 10%. That would suggest that the basement is going to cost you $22,727 to finish. You might feel like spending that much to put an extra $2,273 in your pocket is a good deal. Well if the economics were different and the profit margin on finishing a basement was only 9%, you would need to tie up $22,935 in order to put an additional $2,065 in your pocket. You are spending more money to make less money… at some point, 8%, 7%, 6% you are going to decide that what you keep is simply not worth what you have to do in order to earn it. Same deal with small business owners.

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  4. 3) His comment about small business being burdened.

    Here he is 100% correct. The government is putting too much of a burden on Small Businesses. Think about taxes alone. Think about a small company that is very close to both of our hearts. How big is the accounting department? Six or seven people for a staff of less than 50 people. While not every moment of their day is taken up with tax stuff, a huge amount is. Think about that HSA meeting… how much preparation went into that and how confused was everyone walking out? The whole thing was about taxes, not the benefits of the program itself. This link give you a great idea of the cost of business on business in general, small businesses in particular. http://web.sba.gov/faqs/faqIndexAll.cfm?areaid=24

    The thing to remember is that all large companies started out as small businesses. Small companies are where people are hungry for success, have great ideas and are willing to take big risks for big rewards. By burdening them with red tape and by reducing the reward part of the risk / reward relationship (by increasing taxes) the government makes it that much less likely that entrepreneurs will put their money into those small businesses in the first place.

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