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Thursday, October 16, 2008

Small Businesses and the Fatal Flaw of Obama's Tax Policy

Throughout last night's debate and the campaign in general, there has been much back and forth over just exactly how Barack Obama's tax policies will affect small business owners. John McCain says that almost half of small businesses will be affected while Barack Obama says it will be a small minority. Just today, the New York Times weighed in to back up Obama's assertion.

According to figures compiled by the Small Business Administration, there are fewer than six million small businesses that actually have payrolls. The rest are so-called nonemployer firms that report income from hobbies or freelance work done by their registered owners, earning as little as $1,000 a year.

Of these, according to a calculation by the independent, non-partisan Tax Policy Center, fewer than 700,000 taxpayers would have to pay higher taxes under Mr. Obama’s plan. But even some of these are not small-business owners in the traditional sense; they include lawyers, accountants and investors in real estate, all of them with incomes that put them in the top tax

So are there “millions more like Joe the Plumber,” as Mr. McCain contended? Probably not. Mr. Obama may well have been correct when he stated that “98 percent of small businesses make less than $250,000.”

The New York Times takes the standard nothing to see here approach to the impending massive tax hike that will occur to many small businesses. Most of the media is asking the wrong question. The important question, to me at least, is not how many small businesses will be affected but which ones they will be. The answer to the second question is the largest and most successful. If you punish the largest and most successful then that punishment filters down. Furthermore, the largest and most successful also account for the majority of the wealth and jobs created by small businesses.

Let's look at the issue from another way. We can all agree that successful small business with 100 employees will be affected by Senator Obama's tax increase. The owner of this company will not only see their income taxes go up by about 6%, but they will also see a new payroll tax on all of their income above $250,000. If this small business owner makes one million dollars yearly, that might mean new taxes in excessive of one hundred thousand Dollars. Here is what Barack Obama isn't telling everyone. Small business owners want to be larger small business owners. Larger small business owners want to be big business owners. The way they get there is by investing everything they can back into their small business. That means that this small business will have about one hundred thousand Dollars LESS in investment back into the business each and every year going forward.

So, you say that's no problem because this small business is the exception and not the rule. That maybe be so, but it takes 20 small businesses employing five people to equal the number of people that this business employs. That means even if this sort of a business the exception, their sheer size relative to others means their affect on the overall marketplace is exponentially greater than the bulk of the small businesses that won't face a tax increase.

The main flaw is that our system is interconnected. Barack Obama seems to think that you can punish the really successful without that punishment spreading beyond those directly affected. That's simply not the case. The small businesses that will face this massive new tax increase all have employees, customers, and suppliers. If a small business owner suddenly has to pay a hundred grand more in taxes, that's less money to hire people, for new supplies, and ultimately they will have to raise their own prices to make up for the last money. A small business with a handful of employees may not be directly affected by Obama's tax increases. Many of these small businesses have lucrative contracts with larger businesses that are, and once those small business owners get done paying more in taxes they may not have enough left to continue those contracts. It's the small wholesale meat company that counts on the far more successful restaurant for its main contract. If the restaurant has to pay more in taxes, that leaves less money to buy meat from the small wholesale meat company.

What Obama's tax proposal will do is to punish the most successful small businesses. Nearly each and every new Dollar that those business owners pay in taxes is a Dollar less that they couldn't invest back into their own business. That lost investment won't occur in a vacuum. That lost investment will affect their employees, their suppliers, and their contractors. Ultimately, a tax increase on the most successful small businesses is like a cancer through the whole business community. That's the fatal flaw of Obama's tax proposal.


Anonymous said...

According to my research some 60% os small business make over 250,000 per year is sales.

mike volpe said...

That's sales. One of the question marks is whether or not Obama's plan will tax sales or earnings.

The bottom line is whether or not it is sales or it is earnings, the ones that will face this tax hike will be the most successful ones.

David said...

Take this off Reddit....Dont you know this is for Obama lovers!!

Anonymous said...

It's off PROFIT, not REVENUE. stupid tard. Plus if he's doing so well that he's hiring new people to become a larger small busness then he's gonna get a BUNCH of tax credits. idiot.

mike volpe said...

Not a bunch, but 2000. When you compare that to the 10, 20, 50, and 100 thousand in new taxes they will have to pay, it isn't much.

Conrad Bibby said...

Obama's philosophy of taxing success is the perfect illustration of killing the goose that laid the golden egg. Small business is the engine of economic growth. Raiding the coffers of small businesses is just going to stifle job creation, so you end up raising less tax revenue in the long run, while increasing the financial burdens of government at all levels due to commensurate increase in unemployment. From a policy standpoint, it makes no sense whatsoever.

I really don't sense that Obama gaves a damn about the middle class or about the overall economic health of the country. He thinks the country is entirely too bourgeois as it is (and didn't members of Obama's church have to specifically reject "middle classedness?) He's out to prove that the American system as we known it has failed and it's time for wholesale government control over the economy.

Patrick said...

"The way they get there is by investing everything they can back into their small business. That means that this small business will have about one hundred thousand Dollars LESS in investment back into the business each and every year going forward."

Except the money reinvested in such a business generally isn't taxable, qualifying as business expenses. So the business you just described (one that '[reinvests] everything they can back into their small business') is almost completely untouched by Obama's tax plan.

The businesses that will be affected are those that are satisfied with their size/market position, and are operating to maximize profit back to the owner.

If anything, Obama's plan does the exact opposite of what you argue: it 'punishes' small businesses for every dollar they choose not to invest back into their growth.

mike volpe said...
This comment has been removed by the author.
mike volpe said...

Except that the money that they pay in extra taxes isn't available to be reinvested. You are arguing something totally separate. This isn't about what is or isn't taxed. This is about how much money a business owner has available to put into the business. If they pay an extra hundred grand in taxes on income from the previous year, then that hundred grand goes to the government not to the business.

I think you made the same dumb argument on the espn message board where someone else linked my piece. The Obama campaign is trying to pull a bait and switch and make it seem as though increasing taxes on small businesses won't affect them because capital investment won't be taxed. Capital investment may not be taxed, but the income, from which the actual capital comes from, will be taxed. The point is not whether or not a capital investment is taxed. The point is that higher taxes means that a business owner has less money to make this capital investment.

Now then, you said something that is so completely void of reality that it needs to be highlighted because it is a great example of the total lack of reality that defending Obama's proposals must take. Here is what you said.

"The businesses that will be affected are those that are satisfied with their size/market position, and are operating to maximize profit back to the owner.

If anything, Obama's plan does the exact opposite of what you argue: it 'punishes' small businesses for every dollar they choose not to invest back into their growth."

Let me let you in on a secret. Business owners are never happy with the size of the business. Microsoft is attempting to grow. GE is attempting to grow, and you attempt to make the stunningly ignorant statement that someone making more than a quarter million is happy with their size. That sort of a statement has a clear lack of understanding into the mindset of a business owner. A business owner, of any size, is never happy with the size of a business.

A friend of mine just started an advertising business.

guess what. He has plans to go international. That would mean he would be making significantly more than $250,000. $250,000 is what he is planning for three years from now. He has plans to go grow to a billion dollars.

Patrick said...

Simplifying. The question is "Will Obama's tax increase on incomes over $250K stifle (job-producing) small business growth, and to what degree?"

Your answer is "Yes, and by a lot."

Your explanation for this runs along lines like this:

Small business owner turns a $1,000,000 profit/income in year 1. He pays $400,000 in taxes under current law, $475,000 under Obama's tax policy. In year 2, he's interested in expanding, and he has an extra $75,000 under current law to spend on growth, and that's a lot of money, possibly 1-2 extra jobs. That spending would be directly eliminated by Obama's plan.

My counterargument was that if he immediately reinvested almost all of that $1,000,000 in year 1, his after-expense income never would have reached the $250,000 threshhold in the first place, and so the Obama plan would be irrelevant.

I'm sensing that the rebuttal you are trying to make is that not everything put into a growing business can be deducted, specifically capital investment. Ability to pay employees might not be affected, but if you can only afford to buy two new locations for your business, you aren't going to hire as many people as you would if you bought that third new location you would have purchased had McCain been elected.

I would argue that this effect is unsupported by the numbers, though I'm sure anecdotal small business owners would be found under an Obama presidency the same way they were early in the post-hike Clinton years. In general, this effect is weak because leasing capital is perfectly viable. At the end of the year, an Obama small business owner would have less capital equity than a McCain owner, but growth won't be much different.

As to your friend, I sincerely wish him the best. If he is blessed/cursed with the type of success and growth he is hoping for, he'll be quick to discover that the major limiting factor for the best and brightest entrepreneurs in our economy is not our tax policy, but the frustratingly inflexible number of hours in a day. If McCain's plan had some way of dealing with that roadblock to American small business growth, he would definitely have my vote.

mike volpe said...

No, my counter is that he can't put the $75000 back into his business because he has to pay that in taxes. Small business owners don't save altogether much for a long time. They put everything they can into their business. Your argument would have something close to reality if small business owners expanded based on fixed expansions. Small business owners expand whenever they can. Whatever money they have available to expand they use to expand. Like I said, the mindset is to grow as quickly and as large as possible, as my friend says. If he has to spend $75000 more to pay income taxes, that is $75000 less available for expansion.

Timm said...

The part everyone misses is what happens to that profit when the owner keeps it instead of reinvesting. He may go out and buy a new car, or a camper, or a second home, or a big screen TV or my favorite, a new boat. All of these purchases create jobs! He may invest it in stock of another company, allowing it to grow. He may just put it in the bank, which will then have additional capital to loan and help someone else make a major purchase.

If you really care about spreading the wealth around, there is no faster or more efficient way to do that than to buy a large yacht or a private airplane. Both require huge amounts of cash and an enormous amount of labor. Not burger flipping labor, but highly skilled, artisan level, highly paid labor.

There is simply no faster way to separate a man from his money than a large yacht! Giving relatively small amounts of money to the poor only creates low wage service jobs at the local Wal-Mart or grocery store.