His "improving access to capital" promise is not applicable to many small businesses: "...citing IRS data, the campaign notes that "56.8% of total small business income is earned by businesses in the top two [tax] rates, which Barack Obama has pledged to raise." Full article here
In essence, since most small businesses fall into the top two tax rate brackets, most small businesses will be taxed more heavily than they are currently being taxed. The counter-argument is: "shouldn't business owners making $250,000+ per year be able to afford a little more tax?" The answer is "yes," if the business owner has no employees to pay.
Let's look at a small start-up business making $500k per year. If that start-up has 6 employees then we are now looking at 6 individuals sharing that 500k revenue. For the sake of argument, let's forget about business expenses and just consider all 500k revenue to be split evenly. Each employee would earn ~$83,000 per year, putting them well in Obama's "non taxed middle class," so they should see more money in their pocket, right? Wrong. If the business gets taxed higher, the tax expense is passed on to the employees so they may not see a salary raise in the next year, or they may find their benefits reduced, or they may have to start paying for parking. In this example, I'm being very generous in assuming that this start-up business has no expenses and no investors. Add those realistic factors into the mix and the small business which makes enough to pass the $250k threshold, but not enough to be considered a money pit, suffers even more.
Obama is good at the "us against them" pitch between classes, but his tax proposal would actually increase taxes on many small businesses which would force business owners to tighten up on salaries and benefits for the "us" part of his equation.
When Obama tells you he's going to reduce taxes on small businesses, be wary. His definition of "small business" is misleading to a great extent.
What is taxable is net income. So, if a single owner business had $500K in revenue, paid 6 employees a salary of $83K a year, and had no other expenses; then the business made (net) $2K for that year, and the owner would owe no tax at all.
ReplyDeleteUnder Obama's plan, the employees would pay less taxes on their $83K salary. The business would pay no tax at all.
Obama's definition of "small business" is OK with me.
Most businesses are set up as LLCs/S Corps so the business income passes through to the individuals. Each owner would have to earn more than 250k to be hit with the higher tax... not the total business (unless it's a C corp). I think the correct approach is not "can they pay more taxes" but rather question whether higher taxes will cap future growth.
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