the Air Vent

Because the world needs another opinion

Tax the 3%

Posted by Jeff Id on October 5, 2012

I am tired of politics but in the recent debate a topic which I have frequently discussed here took center stage. Taxation of private business in America. Recently, I was critiqued by several readers for making the exact same points that were stated by Romney and Obama. Those unknown wealthy people Obama would tax by allowing parts of an old law to expire, are actually comprised heavily of business owners. Some here even felt I was being disingenuous and several believe that what I wrote was tainted by political views and cannot possibly be realistic. The fact is that about ninety five percent of all businesses in America are forms of S corporations. The profits in these types of corporations are reported by shareholders directly on their tax returns. These profits are never fully spendable cash by the shareholder as reinvestment is absolutely necessary for the continued function of the company. The net tax rate vs personal cash in a pass through S corporation is often very high.

Ok Jeff, we get it.

So remember what happens when a politician wants to limit something they don’t like, something unpopular that a small fraction of the population uses to their own detriment, what do they do? Hmmm…….

They tax it to increase the cost and limit usage. Examples are Cigarettes, Alcohol, CO2, sugary drinks, speeding, junk food, energy, or whatever product becomes the target in the popular media that day. The cost is a load which reduces the buying power of the consumer to direct them away from the behavior.

About half the jobs in the country are created by pass-through S corporations known as “small business” even though they can have hundreds or even thousands of employees. Obama had the guts to actually say, I don’t want to tax them all, only the top 3% of the businesses. Unfortunately, those 3% he mentioned are are comprised of the successful owners who employ a huge portion of America. Many of the rest have little or no income whatsoever. I also own part of a technology holding corporation which by intent creates almost zero income. Those top earning individuals (businesses) are the same people who fall into the 1% known as the “wealthy” that Obama has been intending to hammer all along.

I have to tell you folks, you don’t need to be a very big business to fall in that 1 percent. You also don’t have to be very rich. All you have to really do is be successful at growing to a moderate size and you will get hammered and looking at the various other tax increases proposed, none of it is good for business. No surprise considering the relentless demonization business owners have been suffering for the last 50 years by the left-wing press.

“Jeff it is only a return to the Clinton era tax he is proposing. It isn’t that much money.”

Not true my friends, not at all. Many large expenses have increased faster than inflation since the Clinton days. Fuel – due to left leaning law. Employment insurance – due to left leaning law. Health care premiums (way more than 4%/year by the way) – due to left leaning law. Minority favoritism due to left wing fairness. Environmental regulation, accounting reporting, tax filing, product liability, workmans comp, all skyrocketing due to left wing law. Not that conservatives haven’t added cost also, but this is absolutely the result of a left sided anti-business mentality in media and popular culture.

All of these are hidden costs which could be considered taxes for the common good, that have gone up faster than inflation. Some of it might be ok, but taken together, it has become amazingly destructive to the economy. So after decades of anti-business policy, the economy has weakened severely and almost 20% of the employable workforce is sitting on the couch watching Phineas and Ferb and less tax is collected as a percentage of GDP.

Obama’s answer!! Tax the millionares. AKA, the 3% of small businesses that are actually still successful at creating jobs…..

This simply cannot be due to rational hope for a solution to the lack of jobs. There must be some other motivation because in every other case, when politicians from either party want less of something, they tax it. When they want more of it, they cut the tax.

In fact, Obama was so mixed up that after stating he would increase taxes on millionaires (business owners), he proposed a gigantic 1/4 tax cut on C corporations to create jobs!!! A good idea in my opinion but when you think about it rationally, he is saying we must cut tax for giant corporations (which are easily identified in popular culture as corporations) to create jobs, yet raise tax on other corporations which due to the nuanced tax law can be used to “trick people” by calling them “the millionaires”.

Tthe Obama proposed small business “millionaire” tax will literally have a cost equal to the salary of 10% of our company’s workforce. That money will come from somewhere important because the government still frowns on personal cash printing presses even though theirs are working overtime. It would be fun to try to make a good one though 😀 What I don’t get is why people can easily grock that a cigarette tax must limit cigarette usage, gas tax limits CO2 production, yet not notice the consequences of a business tax increase when jobs are nearly non-existent.

The world class irony is status-quo in my view, and that is the memo.

70 Responses to “Tax the 3%”

  1. M Simon said

    Well if they are not going to cut expenses they have to steal the money from some one. Not stealing you say? Try not paying. Men with guns show up and they can kidnap you. Legally.

  2. Conversely, were Romney’s current proposal adopted, it would add 4 person’s salary back into our company.

  3. CDM said

    Hi Jeff. We’ve had this discussion before, so I won’t repeat all my thoughts in detail, but I do want to state I still feel it is more complicated than you present it and than many politicians portray it. For example, for a while Michelle Bachmann was fond of saying the proposed marginal tax rate increase/cut-expiration (for the portion of take-home taxable income about $250K) would, for example, hit a carpet-laying business (ran and owned by two brothers in her choice example) that has $250,000 in sales. Not true. (And I assume she knows that?) The income tax doesn’t hit gross sales of an S Corp, only hits the net profit (which is, of course after paying employee salaries too) taken home by the business owner as personal income. It is easy to believe a carpet laying business might have $250K in gross sales, but the carpet layer/owner himself is making $250K/yr net income? Doubtful. And, if his business is indeed that profitable, the general public seems to think he could go back to Clinton-era rates.

    I am also skeptical that environmental and employment regs have increased all that much since 2000? (But you certainly are correct that health-care costs have.)

    I do acknowledge that my own limited S-Corp business-owning experience is far, far simpler than yours (i have no inventory issues and no real employees). I am very reluctant to even call mine a “business”. (It is simply an engineering consulting practice.) You have convinced me in the past that I don’t understand your business tax situation. The fact that your company is organized as an S corp and has to reinvest your profits does seem to create very real cash flow problems…I do believe you that the income tax rate creates cash flow problems for you there. It limits the after-tax cash you have available to reinvest in your company. (Though for me income tax does limit the cash I have availble to reinvest in my company…or into Exxon or Apple for that matter.)

    I trust you have a good accountant…you have said emphatically that you do. But I have heard plausible arguments that perhaps an S Corp is a bad choice for a growing manufacturing business…a regular C corp might be better. I don’t pretend to have expertise on that, but I know just enough about the tax code that the argument sounded very logical. And I know just enough to be dangerous, granted. (Another part of the argument was that high C corp taxes—plus double taxation there for distributions—and relatively lower income taxes of the last 12 year had driven many a business to choose S corps over C corps…so now the prospect of raising income tax rates creates a problem for them.

    I suspect the country would do fine if upper income rates and cap gains rates reverted to 1990’s levels. (Along with perhaps a C Corp tax cut.)

    I don’t claim to have the answers, but I am pretty confident it is not black and white.

    • CDM said

      sorry for the typos. “about $250K” meant “above $250K”.

    • CDM said

      The other thing I don’t get about your situation is this: the proposed income tax increase (or “tax cut expiration” depending on your politics) affects only that portion of any individual’s take-home income that falls above $250K/yr. So, if your personal share of the profits were $250,001 last year, you are looking at a tax increase on that last single dollar (not the whole thing). Are you telling me that your struggling/growing mfg business has more that $250K/yr in net profits PER OWNER? Isn’t that—that level of net profit per year per owner—what it would take for the proposed increase to affect you?

    • CDM,

      I will take the time to reply tonight.

      • CDM said

        Thanks. While you are at it, I also still have the question about your reinvestments not being sheltered from taxes over the long term. Some portion can be expensed and other can be depreciated. I can see how the depreciation limitation for expensive equipment creates a cash flow problem in a given year, but it seems like it would, over time, work out such that you only pay income tax on truly “realized” personal income. (But I guess that still leaves you with a financing or cash-flow problem in a given year.)

        At this point I am really not “challenging” you as much as I am trying to understand. Thanks.

        • Hopefully you don’t take my somewhat abrasive personality as defensive. 😉 I have to read with my son but will do my best on this later as well.

        • CDM said

          Thanks. While you are doing that, food for thought: Imagine a future year in which your company is “built out”. You don’t have the need to buy new equipment (sure you do have to do maintanence, but give me this example). So, this expensive equipment is churning out widgets you are selling for a profit. You don’t have to sink your cash into the company anymore, yet some of the profits that year get sheltered from taxes since you are still depreciating that equipment purchase. So, over the long run, you will only pay income tax on real income, i.e., real profits, and you only get hit (over the average) with the upper-bracket income tax increase if your effective personal income is more than $250K/yr per owner. I’d like to know where i am wrong on this.

          • If the equipment purchases ever really stop, you are in big trouble. This means you end up paying quite a high percentage of your income to government on a permanent basis. The purpose of it though, is to make money and that is still possible in this market. The point though, which we have drifted away from, is that it simply doesn’t make any sense to take more from business when what we need are jobs. The other point, not stated here, is that it won’t make any dent in the government spending deficit anyway.

            Those 3 jobs from our company will turn into about 0 federal employees. If you consider a 3.6 trillion budget we send about 680,000 dollars PER federal employee to the government.

          • CDM said

            Hmmmm. Well, I still say that if your S-Corp’s current need for reinvesting taxed profits in equipment doesn’t eventually equilibrate with its depreciation and expenses (thus letting you keep some profits), then you need a new accountant and/or different tax structure. My second theory (just a brainstorming stretch) is that you and/or your acct knows that the S-Corp would create such penalties in the short run, during growth, but that you all are hoping for a better payoff via the S-Corp than the C-Corp at some future date.

            I think you once agreed with me that a small increase in upper-bracket personal income tax rates were not a particular disincentive for my tiny S-Corp and many like it (since I can expense and/or depreciate all business costs with pre-tax income). You did convince me you have much different issues with tax and cash flow on a given year, but I still question that is how it will shake out over the long term.

            As you know, I am drawing a bit on discussions we had some months ago. I understand the phenomena of “phantom income” from an S Corp, but surely it is not planned to be sustained over the long run and I am confident it is not the intent (or necessary function) of the tax code to penalize you that way. I remain skeptical, but I think we’ve reached an impasse on sorting that out via blog comments.

    • CDM,

      We are talking about profits. If Bachmann said that in reference to the upper end tax increase, she was wrong. However, Bush cut all rates so perhaps there was some context we’re not hearing in your quote.

      “And, if his business is indeed that profitable, the general public seems to think he could go back to Clinton-era rates.” — No, the left thinks that it would be ok, not the public and it represents a real misunderstanding of where the profits must go.

      “I am also skeptical that environmental and employment regs have increased all that much since 2000? (But you certainly are correct that health-care costs have.)” — Environmental and employment regs have skyrocketed since 1992 and 2000 and even in the past year. People are applying for workmans comp in droves, we are being sued by one of them and have another on insurance for issues we did not create but even without the nonsense, you wouldn’t believe the stories the agents tell. The people need money, the left-wing law allows them to lie freely against corporations to try and get money. Think of it like the lotto with better odds. When it is time for you to get employees, we should talk.

      “. But I have heard plausible arguments that perhaps an S Corp is a bad choice for a growing manufacturing business…a regular C corp might be better.” — I wish it were, but it is not.

      “I suspect the country would do fine if upper income rates and cap gains rates reverted to 1990′s levels. (Along with perhaps a C Corp tax cut.)” — Your suspicion is unfounded in my opinion but I can only speak from my own experience. In our company, the cost will be conservatively 3 people’s salary. I think I will chose not to hire new people rather than fire myself. We will spend less on tooling and over the next few years will make less money, grow slower, hire less people and pay less overall in taxes than we otherwise would have. In the meantime, my new car does zero to sixty in just over 5 seconds!! Good fun.

      ” Are you telling me that your struggling/growing mfg business has more that $250K/yr in net profits PER OWNER”

      Who said we were struggling? Otherwise, hell yes. Like I said, we are one of those businesses which employ real numbers of people. The money flow is tremendous and you must invest it into tooling, inventory and equipment if you intend to survive. The investment always exceeds writeoffs when growing (or living in inflation) so your % tax is higher – in my case by around 10 – 20X and the crazy left wants more. You wouldn’t believe how difficult it is to economically balance a growing manufacturing company in this environment. But this is NOT about me anymore, it is about making other people healthy, productive, happy and giving them the opportunity to cross the ridiculously high threshold to start a serious business. If the government stops the tax increases, our business will invest. If they open the theft valves, we will simply hit the breaks and wait for people to see the effect and get smarter. If they cut rates, we will invest heavily and absolutely boom.

      I wonder which path those 22 million people who need work would prefer.

      • CDM said

        Bachman was talking only about the upper-bracket tax cut expiration, not all the tax cuts, i.e,. she was talking about the famed “those making over $250K/yr” group. Her context was trying (too hard) to say this would hit a small mom and pop business. In that case, she was confusing “money flow” with the owner’s personal profits. I am not trying to take up the debate about what is small vs large with that (or if that even matters wrt general employment and “job creation”), just that her example was wrong. Misinformation, I suspect.

        For the rest of your replies, I’ll have to digest some of it. I remain skeptical, but I really have little choice now but to assume you understand it and take you at your word for it.

    • Kan said

      CDM – if you have no real employees, and no inventory – in other words, it sounds like a one man shop with some contractors on the side – why did you create an S corp?

      • CDM said

        Kan, I previously had set it up as an ordinary LLC (meaning it was treated as a disregarded “pass-through” entity for tax purposes) and I did my own taxes most years, off and on. It still is an LLC but a couple of years ago I went back to using a CPA and, based in part on a little growth compared to before, she suggested the S-Corp tax classification to save a little bit on self-employment taxes. It doesn’t save all that much (at least not when being conservative on the IRS’s operating guidelines like I am), but it saves enough to justify the extra hassle. (And, yes, I can legitimately support slightly higher tax rates, like 1990’s levels, while also not expecting individuals to pay more than the current code requires.)

        • CDM said

          P.S. I am not entirely sure how much the new S-Corp suggestion was based on having slightly more business than prior years or was just that I had a new and much more attentive CPA. A bit of both I think.

  4. omanuel said

    Jeff, the steady decline in the value of the dollar is my measure of the collapse of this country and its economic system, as . . .

    Sleazy politicians try to squeeze the last bit of life out of “the goose that laid the golden egg.”

    I doubt if Obama or Romney is capable of reversing “death throes” from a decision, based on misinformation, to establish the United Nations on 24 Oct 1945 and save the world by:

    a.) Abandoning national governments and their constitutional limits, and
    b.) Promoting misinformation on energy in the cores of atoms and stars

    Sir Fred Hoyle published misinformation [1,2] on the cores of stars in 1946, but . . .

    From personal travels abroad, and from observing Hoyle in person at the “Gregynog Workshop on Isotopic Anomalies” in Aug 1976 and the Robert A. Welch Foundation Conference on Chemical Research, XXI. Cosmochemistry in Nov 1977, I suspect that Sir Fred Hoyle

    c.) Was “encouraged” to publish deceptive information about the cores of stars in 1946, but
    d.) Retaliated by warning another British author of science fiction, George Orwell, in ~1947 what was happening in science.

    Almost 50 years later Fred Hoyle [3] himself exposed this sudden, inexplicable U-turn in astronomy in 1946.

    1. Fred Hoyle, “The chemical composition of the stars,” Monthly Notices Royal Astronomical Society 106, 255-59 (1946)
    2. Fred Hoyle, “The synthesis of the elements from hydrogen,” Monthly Notices Royal Astronomical Society 106, 343-83 (1946)
    3. Fred Hoyle, Home Is Where the Wind Blows [University Science Books, 1994, 441 pages], pages 153-154

  5. Tom B. said

    And I think that this entire conversation about tax rates is a diversion from the true problem. The problem is NOT that rich people do not ‘pay their fair share’, the problem is that our government is spending too much.

    • Yes sir.

      I couldn’t agree more.

    • richardM said

      Here here!

      Tom – more so that the system of taxation is so complex that few truly do understand it. It’s monkeyed with constantly, so that it approaches the point where you need an almost priest-like cult to assess the Codex and let them determine what to pay. Taxing the “millionaires” isn’t going to address the unemployment issues we face, nor will it address the underlying econominc problems that result in high unemployment. It’s simple economics though – the more you tax something, the less you’ll see (and of course it’s obverse in subsidies).

      I have a neighbor who owns a driving school and handily falls into the “millionaire” description when Obama/Biden talk about increasing taxes for these wealthy “privileged”. The hits he has already taken from the state in increased BO, and other state increases has been enormous. The Patient …er…ObamaCare law has directly resulted in him converting the full time staff he had to part time – he simply can’t afford the cost increases. Taxing him at a higher rate out of “fairness” – a moving target if there ever was one – is not just stupid – but also “unfair”. (Hey, if they can use squishy words, so can I)

      Demagoguery aside – why in hell is Bachmann part of this thread? She is nobody in the context of the choice we face.

      • CDM said

        I had brought up Bachmann just because she provided a clear and simple illustration of confusing small business revenues (or sales or money flow) with net income/profit, plus she provided a classic example of the type of misinformation spread around about tax increases. Incidentally, she was also fond of saying certain businesses with more than 50 employees had already laid off some of their full-time employees due to Obamacare, when the provision she was citing doesn’t kick in until 2014. She is perhaps less subtle and more flagrant than other pols, but she is not alone in doing that sort of thing.

      • Tom B. said

        I’ve always been concerned by the idea that it is “fair” to TAKE from one group of people to GIVE to another group of people. My wife and I have saved all our lives, and because of our frugality, and some minor luck in the recent downturn of the market, we will likely be penalized for our savings by paying more for Medicare and pay higher taxes than the people that ‘expect’ the government to provide for their retirement. Because we worked hard, saved consistently, invested luckily, we will be ‘means tested’ into reduced retirement…. Not sure there is anything ‘fair’ about that.

  6. Brian H said

    Follow thru the logic of your tax rule: taxing the millionaires more will mean fewer millionaires.

    It’s “grok”;
    and, your final sentence makes no sense. The irony is status quo ante bellum (the full phrase; means the state of affairs before the war began).

  7. Brian H said

    corr: “… before the war began)?

  8. Jeff,
    If you were elected president of th USA, you would go down in history as one of the “Greatest” if you were faithful to the ideas in this post

  9. Kenneth Fritsch said

    I think what is often not said, and that goes for many fiscal conservatives, is that the the problem of taxation is government spending. The fairness issue is simply a ploy by big government politicians who have to find the easiest path to funding their big governments. They will tax low income individuals when they can find a way to demonize what those people do like, for example, smoke, drink, gamble and not buy health insurance. Taxing the wealthy and businesses is a ready path to funding because those individuals collectively have few votes.

    When the funding grows less than is needed for grandiose plans – think unfunded liabilities for Medicare and SS – and cannot be raised in real time, the debt and/or consequences of failure are left to future generations to pay or realize. There is total denial that we cannot afford this big government and thus in the meantime we will see political schemes of ways to pay for even bigger government. The detrimental economic effects of more taxes, printing money and controlling interest rates will be either denied or ignored.

    The way to lower taxes and a better economy is less government and we should not be shy about saying that again and again.

  10. eqibno said

    Does the Treasury pay anything to the Federal Reserve (interest or commissions/fees) to provide money/credit/other financial services? If they do, could they save by doing it themselves? (This includes the spread on T-bills versus national debt etc.)

  11. Jean Croton said

    Too bad Obamassiah can’t put a tax on deficits . . . He would raise a t of many and discourage more deficit spending.

    Alas, I don’t think Obama has the economic capability to understand what he is actually doing.

  12. Frank said

    Don’t we need an alternative to the current tax system for S corporations? The money that you take out of your business should be subject to income taxes; the profits retained (to grow your business) should not be taxed at individual rates or even taxed at all. From my perspective, the whole idea of a corporate income/profits taxes is flawed for both large and small businesses. Let’s tax all forms of money paid to individuals (salaries, dividends (at ordinary rates), stock buybacks, executive perks), but don’t tax the earnings retained to grow the business. Governments do need to tax businesses to obtain the revenue needed to provide services that businesses use: roads to your business, police for security, a legal system, schools that education your workforce, etc. One might go so far as to include the Departments of State and Defense as government services you use. The government revenue collected to provide services to businesses should come from a sales tax, since less-profitable companies benefit just as much from these services and since the government needs to pay for these services during economic downturns. A business’s most important product from the government perspective is the money a business pays to their workers and investors, which can be taxed at individual tax rates. Earnings made from outside investment of retained earning could be taxed at individual tax rate, otherwise small companies could turn into tax shelters

    • Anonymous said

      A lower tax rate for retained earnings would make sense. When Obama talks about “millionaires” who have enough, and can afford to pay more, he speaks about the owner of a small software startup with 15 employees, whose company made a profit of $500k – all of which the founder plowed back into the company to pay future new hires. This millionaire paid himself $50k in regular salary, and further has to pay himself $175k just to pay the taxes on the $500k profit – leaving only $325k in the bank as retained earnings. Sure, his tax return shows earnings well above the $250k mark, but he’s not really seeing any of that money. An increase in his taxes directly impacts the ability of his company to grow, by decreasing the amount of profit he can retain.

      I’d think a capital gains like treatment of 15% would be more appropriate for retained earnings

      • That is exactly right. Startups have a very tough slog to get anywhere already and they are talking about making it harder —- to help create jobs.

        If you are in manufacturing, any growth tends to show up in inventory as well so you get equipment, inventory and employment loads all together. The employment load is not insignificant because you are hiring less educated people for non-office work. Many of the costs of hiring under current employment law are very high.

      • CDM said

        Anonymous, I am not sure your example of the owner reinvesting nearly off of his profits from a given year for new employees the next year works that well. Your example can apply to Jeff’s case (expensive equipment that is depreciated out over a long number of years), but in your case the reinvestment would be for payroll, which of course all would come before taxable profit the next year. I suppose there could be a one-year cash flow issue (covered via a personal loan to the business or business LOC?) but I am not seeing it work for your payroll example. It also once again begs the question of why that company is organized as an S Corp instead of a C Corp.

        But, for what it’s worth, I see merit to Frank’s suggustion to rework/reduce corporate retained earnings taxes and shift most of the taxes on the personal income end.

        (In case it is not obvious, I should disclose once again I have no formal training in accounting, taxes, or business. I have just a few year’s exposure to simple small business taxes…enough exposure to see they are fairly logical—even if still painfull—when it comes to accomodating business expenses.)

        • joshv said

          Sorry, did not mean to post anonymously. It works for payroll just fine. Sure, all that payroll paid in the second year will offset taxable income, maybe even to the point where the owner doesn’t have to pay taxes the second year – but so what? Increasing the taxes on those retained earnings will directly affect his ability as an owner to retain those earnings for future growth – doesn’t matter what he spends it on. Each additional dollar taxed is a dollar he cannot save to invest in future growth.

          My point was to show that there are cases, and not uncommon cases, where you have an owner of an LLC or an S corp who reports a $500k+ gross income on his tax return, when he’s getting crap for actual salary. Sure, the company is making enough to cover the taxes, but the money is not coming our of his own personal yacht fund, it’s coming directly out of funds that could be used to expand the company in any number of ways. His income *is* the company’s income, in a very real sense and to call him a millionaire is idiotic. You might say “well, he’s now got an asset that’s worth at least $500k” – but does he really? It’s a business with a significant burn rate, in an uncertain economy. All that money could be gone in 6 months, with nothing to show for it.

          I am a member of an LLC where this exact issue has come in to play now two years in a row, as we are still growing. And really the retained earnings are also just money in the bank as a buffer as well – as it’s freaking impossible to get a bank to give us a loan, even with long term provable contracts for our software. These days If you want a cash flow cushion you’ve got to save it yourself.

          As for “why aren’t you a C corp” – very very good question if Obama gets his way. But hell, how about we just fix the tax code here to treat retained earnings differently than personal income.

          • CDM said

            Joshv, Thanks. I am softening up a bit on my prior “position” based on the examples you and Jeff have told me over time. I do still suspect (suspect—>there is a squishy notion after all) that the tax incurred on what is effectively retained earnings is exacerbating a short-term cash flow/credit problem more than it is creating a long-term tax problem (i.e., it can and should wash out over time so that only real income gets taxed…eventually). But, even if it does balance out over time, I can now see it can create a very real obstacle to growth in a given year all the same. Dang, I don’t like being [potentially] wrong.

            Jeff and Joshv: Joshv raised an interesting point. Rather than oppose increases in marginal tax rates on upper-bracket personal income because it will ensnare many growing businesses organized as S-corps, why not just fix the retained earnings taxation issue for S Corps like Joshv proposed? (Or lower C Corp taxes so that the S corp no longer looks better to you.) Would fixing S corp retained earnings help you accept that a small upper-bracket income tax rate increase would not harm small business? How about linking the two proposals? Even regardless of the proposed income tax increases, the business situations you and Jeff have described sound so significant, why have I not heard any GOP candidate take up this issue of retained earnings for S Corps? (Actually, I think Senator Collins or Snow did propose, in concept, some idea like that…to separate out the passive investors from the “job creators” in the tax increase…but blunting a GOP talking point did not win her any friends in either party.)

            Thanks again for the discussion.

          • CDM said

            Joshv: Your example has made an impression on me….we need companies to grow if we want employement to grow. But here is another take on it: This guy profited—profited— $500K after paying expenses and paying 15 employees. Perhaps I have too little ambition (I am a solo shop with occasional contractors and spend too much time on blogs apparantly), but if I were in his place I’d be tempted to not try to grow the company anymore, to not put all of my $500K at risk and instead just try to repeat that good year few more years. I am half joking but there is a point: He could do that, take his income and invest it in land or muni bonds or Apple Inc or Exxon, but he decided to invest more into his company. His basis in the company is now higher, he is hoping to gain more out of it some day either with greater profits or from selling the business. That is no doubt admirable (and yes i think tax policy should encourage active personal investment like that far more than stock market speculation, IMO), but one might argue it is just where he decided to invest his income that year, so that his income tax is no different than another. I feel I have made a weak argument here, but it is something to think about. Is he being punished or are we just failing to give “job creators”/active investors some preferential treatment? And now the tax code grows more complex…

          • joshv said

            Replying here as for some reason I can’t reply directly to you CDM. I do agree, it is more a cash flow issue for growing companies – in fact if credit were easy, fuck retaining earnings at all and live off debt – hire those employees 6-12 months early than you would have, and book a loss every year on the bank’s dime. But given that venture capital and small business loans are pretty scarce these days, your only option is to save the money to grow yourself. And the fact that it’s all going to be a wash 3 years from now is no consolation. I have to pay the taxes this year.

            And yes, if there were an exemption for retained earnings, I would feel a lot better about raising the tax rate on people with $250k/year+ earnings.

          • CDM said

            Thanks again, Joshv (and Jeff). This discussion, and the similar one several months back, has helped clear up a few things for me.

  13. philjourdan said

    Probably the most telling statement made on the subject, was by Obama himself. When told that raising the taxes would not increase revenue, his response was it was not about revenue, but “fairness”. In other words, they do not care what it brings in to the government, to Obama et. al., it is simply a punitive measure.

    • That is another issue about this which I meant to bring up. Why are people deciding what is ‘fair’ to take? I get that sense from CDM as well as CCE in their comments. Like the millionaires have so much so we should take it – not because it helps, because it is fair. On the free market side, our views tend to naturally focus on what works best rather than how much you should get. I would think a liberal would be heavily focused on maximizing government revenue as that argument is often given as a rationale for tax hikes. Libertarian thinkers recognize that maximizing government income is not a goal that is aligned with what is best for the population. At this point, we have gotten so stupid with our regulation and taxation that I would settle for maximizing government income. Of course I strongly believe it would be maximized at a lower tax level.

      It is basically communist to focus the discussion on fairness by individual income. It is especially disingenuous when the complexity of tax code is considered. When it is said that they are taxing the wealthy for the interests of the poor, it is simply a lie.

      • Kenneth Fritsch said

        “Like the millionaires have so much so we should take it – not because it helps, because it is fair.”

        That is the excuse, but the real political reason, and not some Civics 101 fairy tale, is that it is an expedient source of funding for bigger and bigger government. I suppose if it were a matter of total fairness and we had all somehow decided that bigger government was better (and moral) we would not attempt to collect SS and Medicare taxes from the lower income individuals. We have convinced ourselves and the lower income individuals that those funds are going into a trust fund for them to withdraw at some future date and thus it becomes again expedient to collect taxes from lower income individuals in order, not to fund a trust fund, which does not really exist, but to support bigger and bigger government. It is also cynical way for politicians to borrow from future generations by way of these thoroughly legal Ponzi schemes. As I have noted before the sin taxes are conveniently placed on the poor by politicians to fund bigger government by demonizing what should be entirely individual decisions and decisions that harm no one else. The green movement has made efforts to demonize other voluntary actions so that politicians can raise funds through higher taxes on items related to energy consumption.

        You even have the supporters of bigger government arguing at the margins that higher taxes for given individuals really are not all that bad and ignoring the macro issue that with the government taking money out of the economy and doing it by force to support wasteful enterprises like wars, unneeded defense spending, an outdated and an unneeded postal service, government bureaucrats in general, greater regulations of business and individuals, crony capitalism projects and not well disguised spending efforts to purchase votes, there remains a smaller piece of the pie to be used to fund enterprises that depend on the market and customers to support and support it voluntarily.

      • CDM said

        Jeff, I don’t think my own views come out of a squishy notion of trying to compute what is “fair”. I’d say my views have more of an empircal basis that the kind of gov’t we’ve had for the last 60ish years cannot be paid for with flat tax rates, that progressive taxes are the only way to pay for it and that history shows that we can have a thriving economy under slightly more progressive taxes than we have now. It seems to me the optimal level is very likely a bit higher (again, 1990’s anyone?), and considering the massive debt and deficits we have, going back to higher revenues (and, yes, also paired with even higher spending cuts) is necessary…and becoming urgent.

        However, there are fairness ideas we could consider. We probably agree everyone should feel a roughly equal “pinch” of paying Fed taxes? So, yes, the low-wage worker in the infamous 47% probably should pay some amount—even if token—to have skin in the game and to better care how the Fed tax dollar is spent. That is some tax fairness you probably could get behind. But 15% pinches the low-wage worker more than 15% pinches the hedge fund manager…so what tax rate is “fair” for the hedge fund manager then? Or for the passive investor? For what people inherit?

        I am not necessarily taking this position, but lefties would point to estimates that much (20% to 40%?) or our current deficits come from the Bush-era tax cuts that mostly accrued to the upper 1 to 3% (for a mix of reasons) ….that during that decade the after-tax income of the upper 1% grew a lot while the middle class real income shrunk. So they’d argue that the most “fair” way to repair that budget hole is to have upper incomes cover much of it. The upper end blew open the hole so they should fill it. (Again, I don’t want to argue that point, just shedding light on the “fairness” idea having some substance—right or wrong—of it being more than just good vibes and rainbows.)

        Also, separate from “fairness”, there are also legit arguments that taxing concentrated and entrenched wealth (think Teddy Roosevelt, estate taxes, and trust busting) is optimal for the economy and country, including enterprising folks like yourself. Idle wealth used to be seen as a drag on a country and detrimental to folks like you.

        But I have really digressed and jeapordized my own revenues for the morning now.

        • CDM said

          P.S. As for “the kind of gov’t we’ve had for the last 60ish years”, I am very sympathetic, even in agreement, that the spending growth trajectory we have been on (for a while) is seriously unsustainable. The projected growth (in items like Medicaid, for example) must be chopped and recent growth trimmed, IMO. But that still leaves us with a need to pay for items that are likely to remain, not to mention highways and defense and R&D. (I am not a pro-handout liberal, I am a pro infrastructure liberal—parks, highways, universities, R&D, etc.) I didn’t mean to get so off topic, I just don’t see why letting the Bush era tax cuts expire is seen as such a line in the sand to the right.

        • Frank said

          Sorry, CDM. 80% of the Bush “tax cuts for the rich” went to people who Obama now considers non-rich (<$250K). In the process Bush increased the fraction of people paying no or negative income taxes to today's infamous 47%. The debate about taxes today is about the remaining 20% of the Bush tax cuts.

          If it would really help eliminate the deficit, I'd personally be happy to raise everyone's taxes including those with zero and negative rates. If our crisis is so bad that we can't operate without more revenue, then ask everyone to contribute a little more and ask the wealthy (who have done better lately) for the largest share. Unfortunately, even if we gave the Dems enough revenue to eliminate today's deficit, we all know there is nothing way to prevent Congress from increasing spending and running a deficit tomorrow. Federal and state health care spending have been rising at a real rate of 1% of GDP every four years for the last two decades before Obamacare and your taxes need to increase by a real 1% every year to keep up.

          The line in the sand is caused by the fact that government expenditures have grown to 24% of GDP under Obama when they have been less than about 20% for the past few decades. Record levels of spending as a % of GDP + record deficits = intrasigence.

        • ” but lefties would point to estimates that much (20% to 40%?) or our current deficits come from the Bush-era tax cuts that mostly accrued to the upper 1 to 3% (for a mix of reasons)”

          Check the spending increases on the government website. Wanna know why Bush wasn’t popular with conservatives?

          ” The projected growth (in items like Medicaid, for example) must be chopped and recent growth trimmed”

          In my opinion, legal regulation of the medical industry needs to be trimmed.

          The reason Bush cuts occurred is because Bush inherited a recession. We had old tax rates with piles of new regulation. Everyone says the regulation adds cost, but when we explain that we in business cannot pay the taxes any longer, the costs of the new regulations are forgotten. We conservatives say – don’t tax gas, don’t tax CO2, don’t add this burden for filing tax, don’t add this cost for health care. What we get in return is “why don’t the tax rates work from the old days?”.

          Here is an example:

          An employee today falsely claims sexual discrimination:

          Today the regulations are structured such that the federal government takes over the investigation. Despite stupid lines in the forms about perjury, lies by the employee are not functionally prosecutable by the employer and employment law attorneys know it. The attorneys make the lies, the employees can only collect a fraction of the attorney take. The employer finds themselves in a situation where they must prove the employee is making false claims rather than the employee proving fault by the employer. The minimum cost to go to court and “win” is 130k. What should an employee do? What should an employer do? Many of us employers like to take these things to the wall anyway because the employee is often a liar who has some inkling of the process. We often win too, —– a negative 130K. If we lose, it costs 300. So we are forced to buy insurance, for a substantial fee.

          These asinine rules are everywhere. Guess what happens if you have a “spare” fire extinguisher sitting in a corner? You know the old dusty one which you don’t care about that is not even a part of the primary extinguishing systems perfectly labeled, trained and presented. All placed in that steel and concrete building that 12 drunk Alabama conservatives with a drum of gasoline couldn’t ignite. Guess what training costs?

          These are also taxes. Every burden on society on any person or business is a tax on all of us. Tax evil cigarettes and it slows Tickle Me Elmo purchases if that is even possible anymore.

          Funny, but true.

          Where would that same lying employee get in 1980?

          Is that a worthwhile tax? — The lawyers (who write the laws) think so!! haha.

          So, if we are for parks, we ask society to take energy from something else. If we are for roads, we take energy from something else. If we are for education, CO2, fire-extinguishers, training, heat, welfare, cell phones for the poor, wars, public transportation, public entertainment, “rule of law”, on and on and on, we are stealing energy from the primary food source …. business.

          These “thefts” may be for the overall good, but they must be recognized by those intellectual liberals who prefer to look at the bulk federal numbers also. The costs are higher than most peoples annual salaries.

          If we are all for something different, and we all win our “for”, then we get serious overspending. It is time for America to recognize these factors and take some serious pro-business stands.

          As my examples illustrate, the biggest problem with liberal thinking is that people don’t understand that ON AVERAGE the people who write the laws don’t have our interests at heart. Individually, they may. Once the power is given, it is gone.

          • page488 said

            Damn, Jeff! Why do you always have knock Alabama? Alabamians are not ALL STUPID. Can’t you come up with another state — try New York. Unlike them, we vote conservative here, and not because we are all racists; there are enough black people here to change the voting results to liberal, if they chose that!

            Love your site, as you know – hate being singled out as the country’s most ignorant. Aren’t I an example? I’ve participated in this site almost from the beginning!

            I’m a little petulant right now – hitting the big sixxxxx-ohhhhh on Thursday.

            This is a most fascinating thread, BTW.

          • page488 said

            OOps – didn’t mean for the post to be in all bold face – screwed up my HTML – haven’t used it in a while! Take care.

          • Sorry for the Bama bashing. I had 3 bottles of a particularly good microbrew when I wrote this. My head is paying the price this morning…

          • page488 said

            OK, Jeff – you are forgiven!!! LOL

            ROLL TIDE….ROLL

        • philjourdan said

          Optimal from what standpoint? Again, it comes down to simple questions. Is your end purpose government for the sake of government? Or is your end purpose the maximization of the country’s wealth and therefore the wealth of all citizens?

          If you answer the former, then the intelligent liberal will look for the Laffer Peak. If your answer is the latter, then you look for minimal sustainability of government with maximization of wealth to the citizens. The problem is liberals do not believe in the Laffer Curve (we are about to get a text book lesson in it from Spain and France), and so they kill the goose that is laying the golden tax eggs.

          But in any event, increasing taxes just because you can still have growth (how much is the $64 question) is actually saying you want to maximize government for the sake of government, not for the benefit of the people.

    • CDM said

      “When told that raising the taxes would not increase revenue”. The word “told” is telling, as well. The belief that tax cuts pay for themselves is and that tax increases lose as much as they gain is not black and white. It is pretty hard to find clear evidence pro or con, but objective analysis of the Bush tax cuts are that they lowered revenues. (How much is a legit debate.) And i’ll keep thinking back to the 1990’s when we had slightly higher taxes and economic growth. Of course we had much higher marginal tax rates historically during growth periods as well, but it gets complicated the further back you go about how much was sheltered, etc. But, even if the very high marginal rates were successfully avoided in the past, the effective rates paid by the wealthy in the past were indisputeably higher. So, anyway, some may doubt that raising upper-bracket marginal rates will raise much revenue, but no one can “tell” us that is the case.

      • philjourdan said

        You have but to look at history. It is a wonderful laboratory of what does not work with tax rates. We have had them higher – much higher in the past. And the evidence is plain. It does not work. While one may argue whether the Bush Tax cuts increased revenue or not (revenue increased, that is not in doubt), the simple fact is neither Obama nor his minions have ever tried to claim that raising taxes on EVERYONE was good for the economy. And that is why they have maintained the tax rates established by Bush even on the middle and lower incomes. These are the facts, not speculations.

        In the end, you have to ask yourself what is your goal. Is it to instill your definition of fairness (as your definition is subjective and does not match anyone else’s)? Is it to grow government for the sake of growing government? Or is it to help all people by helping the economy?

        If your answer is A or B, then raising taxes is a must (the only question is by how much, not on whom). If your answer is C, then minimizing taxes is your course of duty. In the end, taxes are an economic killer. A necessity to fund the essential parts of government – which is to provide a safe market for the private sector to be able to operate efficiently. And nothing more.

        The problem with liberals is they have never been honest about what they want. As you can see, honesty is very telling. If they were honest and stated that their goal was A & B, they would not be elected dog catcher. yet while they claim C, their actions are always A & B.

  14. CDM said

    Jeff, To risk another digression, here is an idea you might like. Paying one’s Fed income taxes (and SE taxes) quarterly with your own big check—as I do and you do—burns much more than having it come out of your paycheck each two weeks before it is ever in your hands. If I were an anti-tax conservative, I’d try to abolish payroll withholdings and have everyone pay it quarterly themselves. Of course that is an impossible administrative and collection nightmare, but a funny point to consider.

    • Frank said

      If you think workers paid every two weeks or monthly don’t know exactly how much the government is taking, think again. They see gross and net for every paycheck and then the grand total when they fill their tax return at the end of the year. (One of my relatives still quotes exactly how much more the Clinton tax increase took out of HIS Social Security after Clinton promised not to do so.)

    • page488 said

      Actually, under Obamaram, this probably a pretty good idea. Nobody would pay their quarterly taxes and Mr. Obama could hire even more IRS agents. I’m sure he would love the ensuing fiasco!

    • philjourdan said

      Actually, while you are correct that it would be an administrative nightmare, it is actually a serious point that is being considered – by the conservatives who are against raising taxes.

  15. Anonymous said

    Jeff and others: The reason we want politicians to strive for a “fair” tax system is because of events like the American Revolution, the French Revolution and both Russian Revolutions. We had the 1960’s with massive disorder in our streets, the Great Depression significant interest in communism and socialism, Gilded Age with anarchists and other radicals, the Whiskey Rebellion, and now the nascent Occupy Wall Street. The rich, frankly, had more to lose than the non-rich. Unless we are willing to settle the government our poorest citizens can afford – essentially no government – no taxation system is ever going to be truly FAIR; but the perception that our leaders want a system that seems fair and raises needed revenue while doing minimum damage to personal finances and the national economy. So you can be proudly pay your “fair share” or begrudge every penny, but don’t ask for a tax system that doesn’t strive for something that appears somewhat fair to most citizens. The recent trend towards less upward mobility and the rewards of economic growth being concentrated in the paychecks of the rich may not be the result of an unfair system, but a “fair” tax system needs to recognize the reality of this change.

    • Striving for something perceived as fair by all is a fools game. Leveling the playing field by redistribution does not work because it incents people to stay home. The other guy always has more and that allows greedy politicians to paint them as the enemy. This discussion should not be about what is fair but rather about what maximizes peoples living quality. Living quality, of course, includes environment, education, infrastructure, etc.. and tough love safety nets which press those who got in trouble back on their feet. In my opinion, there is a whole lot of middle ground to discuss reasonable taxation and reasonable governmental levels in terms of function rather than fairness.

  16. omanuel said

    I encourage you and your readers to pose the best climate question for the 2012 presidential debate here:

    1. The New York Times Dot Earth:

    2. Professor Curry’s Climate Etc :

    PS – I suggested two questions:

    1. Is Earth’s heat source a pulsar? [Nature 270, 159-160 (1977)]

    2. Is it stormy or stable? [National Geographic (July 2004); LPSC XXIX, 1041 (March 2001)]

    Click to access lpsc.prn.pdf

    And then combined them into one:

    3. Does AGW advance the goals of a tyrannical one-world government by ignoring the force that extends from the powerful solar pulsar core out another 100 AU (astronomical unit = Earth to Sun distance) beyond our beautiful, water-covered, life-sustaining planet ? [“Voyager’s long good-bye – NASA probes find surprises at the edge of the Solar System,” Nature 489, 20-21 (2012)]

    It doesn’t matter who is right, but it is important that these issues be addressed openly in the 2012 election campaign. Society is slipping into disarray, and that is in nobody’s best interest.

  17. Ben said

    Just to add some data to this conversation from a normal on looker. Top Marginal tax rate has never driven federal revenue. You can see that income tax revenue grew as the cash economy dwindled and income became harder to hide from the government. In addition women entering the labor force greatly increased the taxable base even as rates we reduced. In the past the higher the rate is the harder people work to avoid paying it. Check out this chart of income tax revenue for the federal government in 2005 $ per GDP so population and inflation are normalized out.
    income tax history

    The death of the cash economy in the 90’s is stark in that so much more income was acknowledged and taxed.

    Then check out income tax as a percent of GDP more or less flat regardless of tax rate. Lowering taxes increases GDP which increases gross revenue.

    income tax %GDP

    Have a nice day

  18. Kenneth Fritsch said

    With CDM and others here arguing at the margins and ignoring the bigger picture, I think it is essential that we realize how it is that politicians react and think in the real world and not in some sanitized version we might read in Civics 101. Tax increases almost always equate to more spending and not deficit reduction.

    When someone argues about how benign taxes are, asked them what they envision for the size of government.

    “Tax increases can’t close the gap because any new taxes will spur further spending, argues Richard Vedder, an economist at Ohio University. Politicians want to be reelected, and tax-increases make reelection more difficult, so “they offset the negative political effect of [imposing] higher taxes by increasing spending,” said Vedder, who has tracked taxes and spending from just after World War II until 2009. During that period, he said, every $1.00 of increased tax-revenue spurred federal spending by roughly $1.17.”

  19. Jeff, a letter of mine in The Australian newspaper two months ago on “Mining and prosperity” is pertinent:

    Economic prosperity depends on facilitating competitive industries, not propping-up non-viable ones. Yet government policy is often perverse. We see in the case of mining that the government, rather than ask how it can foster mining investment and output, has impeded it with excessive environmental, planning and industrial relations regulations while seeking to use it as a cash-cow to fund unproductive spending such as car industry subsidies and costly, inappropriate, school buildings (“A pity prosperity depends on mining,” 27/8).

    Governments do not create wealth, but the services they choose to provide depend on wealth creation. If you want resources to look after the poor and unwell, you must first ensure that you look after the wealth-creators rather than handicap them.

    • Jeff Condon said

      Thanks. I was talking with my uncle this weekend who reminded me of a better time when people in the US elected presidents who actually cared about business.

      After all, the chief business of the American people is business. They are profoundly concerned with buying, selling, investing and prospering in the world.

      President Calvin Coolidge’s address to the American Society of Newspaper Editors, Washington D.C., January

  20. DBD said

    You may get a smile out of this:)

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