I have a couple of friends. One is currently an owner of an advertising start up and the other is a CPA looking to buy a successful manufacturing company. Each of their stories are unique and each will eventually be punished by Barack Obama's tax proposal.
My one friend has an innovative idea to bring advertising to all forms of public transportation: mostly buses and trains. (because he continues to be paranoid about new competition I will leave my description of his business at what I have already said and let you visit the link for more details) Now, my friend recently got his first four sales, hired a sales manager, and received six figures worth of financing from venture capital investors. My friend will likely make nowhere near $250,000 this year or next, however he has plans to go international within the next seven years. Knowing my friend as I do, I wouldn't bet against the timeline too much.
What this means is that by 2011 or so, my friend's business will stop benefiting from Obama's tax cuts and begin to get hurt by them. Of course, when (not if) he crosses the threshold of a quarter of a million dollars, he will only have just begun to grow the company. In fact, at a quarter of a million dollars in pure profits is when he will really start to make serious investment back into the company. At that point, the company will be regional on its way to being national. He will need regional sales managers, consultants, and other salespeople. Each and every employee will need to be paid, and according to Obama's tax proposal, they will also need to have health insurance provided by my friend. Furthermore, my friend will be paying more than 6% in extra payroll taxes for every Dollar of pure profit over $250,000. That means an extra $50,000-$75,000 in taxes for my friend when (not if) he is making half a million a year.
Of course, half a million yearly, which I expect him to reach by the end of Obama's first term, is also just beginning of the company's growth. At that point, he will be ready for serious infrastructure: customer service, more physical locations, and of course more sales, consultants, and sales managers. Furthermore, it is around this time that my friend fears that massive corporations like Viacom will attempt to jump into the market and drive him out with resources that will be nearly unlimited. As such, at that point he will need every Dollar he can get his hands on in order to compete against players much bigger than him. How much will Obama's tax proposal be a hindrance to the growth of my friend's business? That's hard to say. I will say that no amount of government interference will stop my friend from where he wants to go. That said, it can certainly slow him down. At some point, the business will b so large that it will incorporate and it may even go public. At that point, the business will face the higher and more punitive corporate tax that Senator Obama plans to employ. In other words, while my friend's company is small and only has a handful of employees he will get a tax cut. Then as it grows to tens, dozens, hundreds, and thousands of employees, he will face a tax increase.
Another friend of mine, a CPA has spent nearly a year trying to buy a manufacturing company from one of his clients. The company is worth between 9-12 million Dollars. This company has more than one hundred employees and it currently nets the owner well in excess of a $250,000 yearly. In other words, once any expenses from the purchase are written off, my friend will face a tax increase each and every year he owns the business.
The current owner is in his sixties and for him the growth of the company is largely in the past. My friend, on the other hand, is in his thirties and he plans on growing the business exponentially over the rest of his adult life. Each year, he will own the business he will face new punitive taxes on this business. That will make all of these things more difficult: hiring new people, expanding, and buying new material.
The biggest problem is that Barack Obama hasn't defined exactly what a "small business" is. The business he is buying is successful enough that it may not be considered a "small business". As such, if the business currently doesn't provide health insurance, or it is inadequate, not only will it be required but there will be no government help to provide it. My friend will also likely see an extra $50,000 in new taxes each year he owns the business in its current form. If he is lucky enough to double the business, well, then so will his extra tax burden.
What if my friend grows this business enough that it would be incorporated and taken public. That is certainly a goal, if not a pipe dream at this point. Then, again, not only would he face the corporate tax rate, but it will be an increased tax rate courtesy of the Obama tax proposal.
Obama claims that his tax proposal helps the little guy, but when you punish the most successful, when you punish success, that hurts everyone, including the little guy. That's what Obama's tax proposal will do, and these two stories are examples of what will face the most successful among us.
Look, we've had a progressive tax system in this country for a long time now. Obama's relatively mild tax increase on very high income earners (e.g., just an increase of 3% if you are at the $250,000 bracket), is not "socialism", is not "punitive," but largely a return to Clinton era taxes for high income earners (an era where we saw good economic growth). I would agree it is possible to go too far, i.e., tax upper income earners way, way, too much, but Obama's tax plans are reasonable, and are not even close to a prohibitive rate.
ReplyDeleteI love your words, like mild and reasonable. That's mild and reasonable as long as you aren't the one paying it.
ReplyDeleteThe reality is that he will increase the top income bracket by 6% and add another 6.25% in payroll tax on any income over $250,000. That means taht anyone making any income of half a million and more will see their income tax increase by about 10% and about half their income will go to some sort of tax collected by the Federal government. If that is reasonable to you, that's your opinion, but it's almost certain that's because you don't actually have to pay it.
As for Clinton, unless Obama has the benefit of something like the internet and cellular revolution, the tax increases won't be masked like they were under Clinton.
So are you a flat tax kind of guy? Or even more extreme, are you a no tax kind of guy?
ReplyDeleteI don't know how either of those two are "extreme", however I am for anyone that can cut government spending and make taxes as low as possible.
ReplyDeleteWell, you don't see your own economic views as extreme but apparently see Obama's as "socialism." I would offer that maybe Obama's views look "so far out to the left" to you only because you yourself are at the fringe right. To those who stand closer to the center, rather than toward the very rightward edge of the spectrum, in Ayn Rand, anarcho-capitalism land, Obama looks to be somewhat to the left but nowhere near "socialism."
ReplyDeleteIf wanting to shrink the government and with it the tax burder for EVERYONE is fring and far right, then so be it.
ReplyDeleteThat said, when you punish successful people with all sorts of new taxes and use those taxes as means of giving money to those that aren't as successful, that is the definition of income redistribution, which is a tenet of socialism.
The left loves to point to the fact that we have almost always had a progressive tax system with higher rates for the wealthy. But what makes Obama's plan particularly anathema to the right is not so much the progressive nature of the increase, but the fact that the proceeds are being distributed to individuals directly. The tax increases proposed aren't going into infrastructure, education, health care or other government programs. That is what makes the plan reek of socialism - the whole Robin Hood aspect of it.
ReplyDeleteObama "says" he will only raise taxes on those making over 250k. Has anyone asked if he will veto a tax bill sent to him by Pelosi-Reid that raises taxes on those making a lower amount? Of course they haven't nor will they. Don't be surprised when O "discovers" that things are so bad he needs to raise taxes on those families above 125-150k. It won't be his fault, of course.
ReplyDeleteHave you also noticed that he talks of capital gains benefits he'll provide to small business. No one in the media sees fit to report that small businesses don't pay cap gains, but rather income tax.
Good discussion. And I like the fact that, for the most part, this discussion is not full of hateful, extreme nonsense; although a few comments are pushing in that direction.
ReplyDeleteWith that said, I would agree with some things on both sides. Reasonable people can find agreement when the look for it as well as disagree civilly.
I do not think that slight rate increases to marginal rates for those over $250,000 is punitive. It won't stop me from trying to get back into that bracket! And increasing the amount subject to social security withholds is also not punitive. A politician could never say it, but the economic concept of diminishing returns applies, in a way, to income. Yes, a dollar buys the same amount of goods/services for a rich person as a poor person. But there is a very significant difference. The $600 extra dollars that "Joe the Plumber" would have to pay if his story actually added up (Tax Comparisons and Joe the Plumber) is much more disposable to him than for the family making only $45,000. When I was making $200,000, a $600 expenditure wasn't even something to think about; we just did it. But for the $45,000 family, that same $600 is a huge amount; an amount that might feed them for the month; an amount they might juggle between food, utility bills and car payments. So yes, folks with significantly more money do have the ability to more easily pay a $600 tax increase.
Another comment states that Obama's taxes would be for redistribution. Well, I disagree. Obama has plans for an infrastructure investment fund to rebuild our roads, highways and bridges. I haven't seen anything from McCain on this. And your friends who are starting businesses will benefit greatly from improved infrastructure.
And we also have the matters of a costly Iraq misadventure which we must eventually pay for as well as a bailout (which I opposed) and an already enormous national debt which was doubled under Reagan and then again under "W" Bush. My kids and grandkids will surely be paying for those debts. But why shouldn't we pay for these debts since we incurred them? The leadership of the past 30 years has been the most irresponsible in history in indebting our future generations. Unlike past generations that always helped future generations start off with a leg up, we have burdened future generations with a very heavy iron ball & chain of debt. Unfortunately, I don't see how either candidate will balance a budget and possibly pay down debt, but at least Obama speaks of revenue neutral proposals and tries to pay for one program by finding savings or responsibly increasing taxes to cover new costs.
Well, enough said. Time to get off of my soap box.
With all due respect, there are several fallacious points in the last anonymous comment. First, Obama's tax plan is absolutely redistribution of income.
ReplyDeleteWhile he raises taxes on the wealthiest, he also cuts taxes on everyone that isn't as wealthy. That is income redistribution.
Second, to say that poorer folks need their money more, is irrelevant. First, 40% of Americans pay no federal taxes. It isn't as though they are burdened with taxes. They have no taxes. More than that, taxes aren't supposed to be social engineering. You aren't supposed to use taxes to lift the burden of those who need it most by increasing the burden of those that need it less. That's social engineering. Taxes are supposed to be a necessary evil. They are supposed to be used as little as possible to allow government to function.
Third to say that lifting the social security payroll tax burden isn't punitive is ridiculous. What Barack Obama wants to do is to tax all income above $250,000 an extra payroll tax. Remember the payroll tax is essentially a credit. The more you put into the system the more you get when you retire. That stops at 102K. Now, he wants to add a new tax but that tax won't go toward credit for that person's future retirement income. Rather that will go to fund the retirement of others. The extra payroll tax is a naked example of income redistribution. It will be the first tax in history that goes exclusively to everyone but the person paying it.
After this "bailout" has rewarded the collasal failures of Republican DEREGULATED industries, we have no choice but to increase taxes to pay for it all...just like George H. W. Bush did...even after his famous "read my lips" speach. Don't you people have any memory of your past failures?
ReplyDeleteBlaming deregulation is a typical thing done by partisans that drink kool aid. None of you can even point to a single deregulation that did this and certainly you can't explain how these deregulations caused this. It is typical partisan nonsense, and the conservatives have their own demons that they go after. Neither of you have the first clue.
ReplyDeleteThe smarter way to do this in my opinion is to cut taxes on everyone a lot and pay for it by cutting government spending a lot at the same time.