Tag Archive for 'marginal income tax rates'

The truth about taxing those wealthy small business owners

In case you haven’t been paying attention, in his address to Congress last week, President Obama promised to raise the marginal income tax rate on the top 2% of taxpayers to help pay for his new agenda and to give the other 98% of taxpayers a tax cut. Now, most folks probably think that this elite group of Americans can handle a tax increase. After all, we’re talking about people like Bill Gates and Alex Rodriguez, right? But in his speech, the president goes on to further define the people on his hit list. Specifically, if you have annual taxable income of more than $250,000, you’re wealthy enough to pay more.

Lately there seems to be some confusion about whether this attempt at redistribution of wealth will impact small business owners. So let me provide some clarity with a small business story that plays out across America every year.

This particular small business will put $100,000 on the bottom line of its Profit and Loss statement. Most big businesses blow more than that every year in wasted soap in the men’s rooms. But for a small business to accomplish these numbers, someone had to work extremely hard and very smart, and at some point along the way, risked everything.

The owner of this small business pays herself $75,000 in annual salary. Not too bad by national average income standards, but still less than she made when she worked for a big company and, when the work, worry and risk-taking is considered, not enough. Oh, by the way, this business that our intrepid entrepreneur started from scratch now provides livelihood, benefits and prosperity for the families of its ten employees. Meanwhile, the spouse of this employer has a job elsewhere that pays him $95,000 annually.

It’s important to note that this small business, like millions of others, is structured legally as a Subchapter S Corporation. That means that any profits produced are distributed to the owner as taxable income to be included with her personal tax reporting. Since this couple files a joint tax return, they have annual gross income of $270,000. Allowing for reasonable personal deductions, their taxable income is over $250,000. It should also be noted that a goodly portion of the hundred grand of business income does not exist as cash - it’s tied up in inventory, accounts receivable, etc. - but still taxable.

According to President Obama, this couple, like Warren Buffet and Oprah, is among America’s wealthy and should pay more taxes. But here’s a critical piece of information that I doubt our President understands: Ask small business owners – as I have – what they would do if they paid lower taxes and every one will tell you that they would re-invest that precious capital in their business. That means buying more capital goods and employing more people. In 2009, it might mean surviving.

So, with all due respect, Mr. President, if you want to get our economy going again, not only would you not raise taxes on even one member of the sector that creates over half of the U.S. economy, signs the front of over 70 million paychecks each Friday, and creates most of our new jobs, but you will find out what they need to help them grow their businesses and do that – all of it. Even if it means you have to cut back a little on your ill-conceived Robin Hood act and even if it means you have to let GM, Chrysler and AIG get a little less bail-out money.

And trust me, sir, this strategy will be time and money well spent for our country - and the world. And here’s a political bonus you probably haven’t considered: it will do more to help you get re-elected in 2012 than anything else you could do.

Recently, on my small business radio program, The Small Business Advocate Show, I talked about the difference between the Obama world view and the world view that I believe is good for small business. Take a few minutes to listen to my thoughts on taxes and other issues. And be sure to leave your thoughts.

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