Look Out – Here Comes the Middle Class Tax Hike

Posted by PITHOCRATES - September 25th, 2010

A Little Business Primer

Who hires more people?  Big corporations?  Or small businesses?  Some may be surprised to learn that small business provides the majority of American jobs.  Little guys taking a risk.  Doing something they love.  Are good at.  They earn a living.  And provide jobs with benefits for others.  Not too shabby.

These people start their own construction company.  Buy a restaurant (from a lunch counter to a fancy place with table cloths and a wine steward).  Captain a fishing boat.  Move up from fixing cars in a backyard to operating a three-bay service garage.  Open a multi-chair hair salon.  Run a landscaping business (and snow removal business in the winter).  Sell ice cream to tourists from an independently owned Ben & Jerry’s on the strip.  Or buy and operate a McDonalds, Pizza Hut, Dunkin’ Donuts, Kentucky Fried Chicken, Taco Bell, etc.

These are not fat cats running fortune 500 corporations.  They’re no Donald Trump.  So they keep things simple.  And yet protect themselves.  They operate as an ‘S’ corporation.  This is sort of a hybrid between the regular ‘c’ corporation and a partnership.  There’s limited liability (you limit your losses to only what you invested into your business).  And there’s no business tax on earnings like in a partnership.  All earnings are distributed to the shareholders (which could be just one person).  And taxed as personal income. 

I Will Not Raise Taxes on Anyone Earning Under $250,000

Sounds good.  Stick it to the rich fat cats.  But who else makes more than $250,000?  I’ll give you a hint.  Reread the previous section.

A small business owner operating as an ‘S’ corporation is likely to earn more than $250,000.  But they’re not fat cats.  Far from it.  Let’s pick a number.  Something you think is fair for a business owner’s salary.  Someone who probably has his or her house mortgaged to the hilt.  Works 7 days a week and puts in on average 80 hours each week.  If they could earn, say, $75,000 working for someone else, would you begrudge them earning, say, $100,000 working for themselves?  For the sake of the argument, let’s say you don’t.  That’s less than half of the $250,000 tax threshold.  The small business owner, the generator of American jobs, should be safe from any Obama tax hike, right?  Wrong.

As a business struggles to grow, a business owner plows most of their earnings back into their business.  To buy a new copier.  Replace a furnace.  Buy new software.  New computers.  A network for your computers.  Inventory tracking.  A new delivery truck.  Decals for your new delivery truck.  Building signage.  A ‘yellow pages’ ad.  New telephones.  A new website.  New invoicing software with a custom-designed invoice form.  Etc.  But before you can spend this money, you have to earn it.  And, once earned, an ‘S’ corporation small business owner pays taxes on it.  Even if they invest it back into the business.  So, the higher the tax rate, the less they can grow.  And the fewer jobs they can create.

The Obama administration keeps bitching about the greedy bankers and big corporations who are sitting on their cash.  (And they sit on their cash for good reason.  They already have excess capacity.  So there’s no reason to expand.  Because there’re no markets to expand into).  The one area, though, where there may be expansion possibilities is in small business.  Raising taxes on those earning over $250,000 per year, though, will kill small business growth.  Kill jobs.  And prolong this recession.  So why do they persist in attacking the ‘rich’?  Because in terms of voters, they’re less of them than those earning under $250,000.

Playing the Numbers

The Bush tax cuts expire at the end of this year.  If Congress doesn’t extend them, taxes will go up and the economy will tank even further.  And Obama will have violated his no tax rate increase for anyone earning less than $250,000 pledge. 

But there will be no vote before the midterm elections.  (See Congress Punts on Taxes by Martin Vaughan and John D. McKinnon at the Wall Street Journal on line.)  The Republicans want to extend them across the board.  This is a problem for Democrats.  If they do, it endorses George W. Bush’s economic policies and discredits their own.  And angers the liberal base.  They would rather extend the cuts only for the middle class.  This, however, won’t help the small business owners (i.e., the job creators).  So the Republicans are opposing this as it will not help the economy. 

Let’s look at the numbers.  Note the chart at the bottom of the Wall Street Journal article referenced above.  Especially the fine print.  It reads, “2008 tax year, an additional 25% of filers are in the 0% rate category.”  In other words, 25% of the voters pay no federal income taxes.  If you add that figure to the sum of the top three ‘Pct. of filers’ in that chart it equals 95.1%.  In other words, approximately 95.1% of voters earn $140,550 or less.  Only 4.9% of the voters earn more.  Hence the class warfare.  And after stirring up the masses (the 95.1%) to hate the rich (the 4.9%), they have no choice but to keep on hating.  I mean, they can’t tell the 95.1% that they were wrong, can they?  Especially when the poll numbers are moving against them.

So, of course, the Obama administration sticks to the time-honored playbook.  And attacks the rich.  In hopes of persuading enough of the 95.1% to forget about results and to just vote their hate.  We call it playing the numbers.  There’s only one problem.  Most of the 95.1% work for the 4.9%.  So if you make it too costly for the 4.9% to expand and create jobs, they won’t.  They may even cut back.  And the 95.1% are the ones who will suffer.  They may see a reduction in their benefits.  Work longer hours (because their boss can’t afford to hire a new employee). They may even lose their job.  And their house.  They may not like that.  But at least they can find solace in their hate.

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