There are lots of issues related to the extension of tax cuts. Here’s one that I have not seen discussed in the public arena.
The strongest argument offered by those supporting tax cuts for the wealthy is that small businesses will lose the money to hire middle-class workers. This argument seems persuasive, but it is totally wrong.
If a small business makes a profit, the owner has two basic choices – (1) take that money out of the business in the form of a distribution (salary or dividend) to themselves, or (2) hire additional people.
If they take the profit as a distribution to themselves, it is subject to taxation. The debate in Washington right now is whether to tax these distributions at the 2000 tax rate of 39.6% or the 2010 tax rate of 35%. By the way, these rates assume their total taxable income is more than $375,000 … if their salary is below $250,000, everyone agrees that their tax rate should remain at the lower level of 2010.
If they decide to use the profit to hire additional people, then the profit is NOT TAXED. All monies used to pay worker salaries are now and always have been a deductible expense and, therefore, not subject to taxation.
When businesses use their profits to hire additional workers – THAT HELPS AMERICA!
The Republican argument, though attractive on its face, does not hold up under basic, longtime tax law. The ONLY result of their proposal is to encourage wealthy small businesspeople to simply pay themselves larger salaries at a lower tax rate – not grow our economy. How does that help America?
Another thing small business owners might do is make capital purchases with profits – assuming they buy American, this would also help America and be non-taxable through depreciation allowances.
<
p>During World War II, it was considered patriotic to pay your taxes, and to buy war bonds with any extra money you might have as well. Folks who think taxes need more cutting should be reminded of this – especially since most of them seem to think that they are more patriotic than anyone else!
<
p>On another note entirely, I made phone calls for you in the special election primary last year, and I’d love to do so again in any future senate primaries – please keep us informed of your plans, ok?
I’m so glad you’re working to make this important point more visible, and I hope we at BMG can help you accomplish that in some way.
<
p>We actually went over some of this last September. I believe I presented much your argument in one of my comments on that thread:
<
p>In spite of my BMG handle, I now live in Somerville and am happy to call myself an enthusiastic supporter of you.
<
p>Not everyone. Tax em all Deval wants to see everybody’s taxes go up. Love em or hate em, the Bush Tax cuts are the most progressive tax policy this nation has ever had, the OECD even says we are the world’s most progressive. More of the burden of paying taxes falls on the wealthiest 5% (45-50% depending on who’s numbers you use) and close to 50% of the lowest wage-earners pay no income taxes at all.
<
p>Deval Patrick wants to revert to a more regressive income tax schedule.
<
p>
<
p>The fact that Deval said, and people believed, with a straight face that he had no plans to raise taxes really confuses me.
The point here is that the Bush Tax Cuts did very little to encourage business growth or otherwise stimulate the economy (while at the same time greatly increasing our deficit and national debt).
<
p>Furthermore, I don’t think you will any rich people who can show that pre-Bush tax rates prevented them from increasing their income at a much higher rate than people nominally paying a lower tax rate. The rich were doing just fine before the Bush tax cut and they will continue to do just fine when it expires.
For the most part, Republican commentators don’t care about policy as EaBoClipper has just again demonstrated by turning a policy comment into name-calling (“Tax ’em all Deval”).
<
p>I suspect this is reflected in a similar disinterest by Republican Congresspeople.
Whether or not you have earned 100 or 1,000,000 in a week, if you earned it, it should be, for the greater part, in your pocket.
<
p>I don’t plan on working hard in the coming years to earn six figures and only bring home five.
<
p>I want my money so that I can buy things I want, eat what I want, invest how I want and plan for my retirement how I want (especially given that I have very little faith there will be SS for me when I retire).
<
p>I’m going to bust my ass to earn my money. Whenever I see the left calling out the rich for their greed, lack of patriotism, their immorality, I am offended. While I lack the wallet of the rich, I share the mindset, and have the goal and path of becoming one of them.
<
p>Sure, hopefully I’ll have enough money some day that it will seem like “a drop in the bucket”, but will that mean that I am any less entitled to that drop by virtue of what I’ve done to earn it? Not everyone who makes more than 250,000 a year gets it by trading stocks or watching their inheritance gain interest. My brother-in-law earns it by missing family parties because he’s away on business, constantly having to take calls, and always worrying whether or not he’ll have a job next year. I’ll be damned if I don’t do everything I can to live the life I want, and I’ll be damned if someone tells me I’m not entitled to as many pennies as I can push together AND I WOULD BE IMMORAL while Paul Kirk gets a senate pension for three months of seat warming.
<
p>Drives me up a goddamned wall to hear how greedy and mean-spirited my keep-what-you-earn mentality is.
Rush Limbaugh is very, very fat with creepy tourism practices.
George W. Bush said whatever he had to say to get the war he wanted.
Any more truths I can write that would offend you?
Is what keeps this country alive. If we didn’t have people who wanted to get out there and earn millions or billions of dollars, we wouldn’t have the money to fund the American system.
<
p>America needs teachers and trash collectors, but we need the rich too.
many of those who who are making their millions and billions have done so using illegal means such as fraud, destruction of the environment, etc., not to mention the marginally legal means of buying off half of our government.
…you have some nerve whining about COMPANIES destroying the enviornment. Complicit or hypocrite?
about how tax cuts for the wealthy increase regressive taxes which take a greater percentage of a 5 and 6 figure paycheck than it does a 7 figure paycheck. If you’re fighting this battle on behalf of the millionaires when you teeter between 99,000 and 100,000/yr yourself, then you’re fighting against your own interests and you haven’t been paying attention. That “compromise” just cost YOU more money.
<
p>Do you get it YET????!!!!!!!
is that the only reason you and I have the opportunities we do to work hard and be financially successful is because of the American social and economic structure that has been built up over time.
<
p>Without government helping to finance the railroads and other early capital improvement projects, we would not have had the infrastructure available to support what would become the world’s largest economy.
<
p>Without social safety net programs like Social Security that pulled many Americans out of poverty and reduced income inequality, we would not have the broader middle-class base necessary to support our current consumer spending-based economy.
<
p>Without strong investments in education, we would not have the knowledge base necessary to keep supporting new technologies and other innovations.
<
p>Without government spending on research projects that led to things like the Internet and blockbuster pharmaceuticals, we would have lost out on major drivers of economic growth.
<
p>The list can go on. I’m sick of hearing people who want to reap all the rewards of the American system while not acknowledging all the costs needed to build the America we have today. Thanks to the wisdom of our forefathers — from Alexander Hamilton to FDR — we’ve realized that a stable and productive society requires appropriate government intervention to both maintain the system and make sure that the opportunities you and I enjoy are available to all. Those who call this “socialism” are both ignorant of economics and history.
I could go on too but it’s going to be tough to persuade our friend who-has-a-little-wants-more.
<
p>….we’ve realized that a stable and productive society requires appropriate government intervention to both maintain the system and make sure that the opportunities you and I enjoy are available to all. Those who call this “socialism” are both ignorant of economics and history.
At this moment, the comment above yours indeed has received six sixes:)
If liberal, appropriate government intervention is more than there is now, if conservative, then less.
I actually giggled out loud.
But we have a country that is completely lopsided in its taxation. The top 1% pay over a third of the federal income taxes, and the top 10% pay over two-thirds.
<
p>Any time that top 10% wants to keep a bit more of their money, the left goes off with how greedy, evil, etc etc that top 10% is. But if it wasn’t for them you would have social security, education, capital investments, and a list that goes on and on.
…is plenty of the rich, both individuals and corporations, find ways to get away with paying much LESS than their share of the tax burden. I think that’s what upsets people so, the nagging feeling that those who work the hardest at the working and middle class levels get stuck holding the bag. I’d still rather be among the wealthiest 1%, tax burden and all, than making low five figures like I am.
Every fiscal year shows the same thing: that the working and middle class have a miniscule bag.
<
p>That nagging feeling you have is what’s not based in reality. You can feel like the wealthy don’t pay their share all you want, but it doesn’t change the numbers.
A big part of the federal debt problem is Social Security and Medicare. These things are funded by payroll taxes, which skew heavily away from the rich.
<
p>I’m not saying that it still doesn’t still skew such that that “the rich” wind up carrying the lion’s share. But it isn’t fair to yelp about the debt problems, which are significantly driven by Social Security and Medicare, while complaining that the non-rich don’t carry their weight, ignoring the Social Security and payroll taxes.
…for Hoyapaul’s comment about effective rates.
That’s a great start as far as I’m concerned.
It matters because nobody should be absolved of the responsibility to pay taxes, and it doesn’t matter because their income share is so low, taxing them wouldn’t have much of an impact on tax reveues.
“it doesn’t matter because their income share is so low, taxing them wouldn’t have much of an impact “
<
p>And you see NO PROBLEM with this???
<
p>The less you tax the rich (proportionately) than anyone else, the bigger that gap between the bottom 50% and what they get as a share of the economy widens. That’s a fact.
<
p>There’s a reason why upward mobility is crap in this country, compared to countries that tax the rich at higher proportions than the poor and middle class. There’s a reason our gap between rich and poor is back to pre-1929 crash levels. That’s because for more than 30 years, we’ve slipped back to 1920s taxation attitudes. We had a century of economic dominance and increasing middle class BECAUSE of the pre-Reagan eras of taxation of the wealthy. Those taxation levels meant we could afford great education for all no matter your class, great infrastructure to get people to work, great amounts of government-funded research, etc etc etc.
<
p>Enjoy your 6-figure prosperity while you can, because it’s under threat due to the shift in the tax burden.
Not only should we “all” contribute but I just feel without contributing that people don’t really care. Maybe even to the Democrats detriment. Maybe if the lower 50% of wage earners in the US who don’t pay ANY Federal Income taxes did, they would be incensed about the latest Obama deal. But if you don’t pay ANY Federal Income taxes, then why would they care if they go up/down/stay the same???
It is completely relevant that “the lower 50% of wage earners in the US don’t pay ANY Federal Income taxes.” These people pay payroll taxes, excise taxes, state income taxes, state sales taxes, various local property taxes, etc. By focusing on one tax, you make it seem like the bottom 50% aren’t paying any governmental levies.
<
p>So why do you keep making this “50% of wage earners don’t pay ANY federal income taxes” argument when you know it is both irrelevant and misleading?
Second, it is irrelevant. BTW, maybe we just disagree and will never agree. I think the open bar analog works… when people have no “skin” in things, they often don’t care. I am guilty of this as well. If I went to a free buffet, I’d probably leave some food on my plate when I was done but if I had to pay for every bit of it then maybe I’d eat it all. If people have no stake in Federal Income taxes then the conversations about them (and how they should be raised/lowered…) is falling on deaf ears, they don’t care. I want them to care. I want 100 million Americans to care if taxes go up or down 2% or 6% and you know as well as I do if poor people were paying Federal Income taxes, they would be quite vocal about any discussions concerning them paying “more” taxes.
<
p>This has nothing to do with any other government levies on the poor.
<
p>You keep bringing up this federal income tax canard as a way to claim that the poor are not pulling their weight as part as supporting the government’s activities, correct? (Otherwise, I’m not sure why you’re bringing this up).
<
p>If so, than it is completely irrelevant and misleading, as I’ve said many times before, to use the federal income tax statistics without noting the many other — and regressive — taxes the poor DO pay. There’s really no “agree to disagree” thing going on here — it’s not a matter of policy disagreement; it’s a matter of you using misleading statistics to make an argument.
<
p>It’s called “withholding”. And I would respectfully remind you that the Earned Income Tax Credit was a conservative invention. That was of course, back when “liberal” and “conservative” meant something.
Call it withholding but it is true that the bottom 50% don’t pay very much of it.
I feel that tax contributions should (at least) be proportional to benefits. For good or ill, both the rich and the country as a whole were in better shape when marginal rates were higher, because there was more upward social mobility, our infrastructure was sounder, and our politics more stable – the latter being my working model of “conservatism” in the American sense.
<
p>I defy you to create an honest empirical economic model demonstrating any net increase in American national equity, relative to the rest of the world; and specifically including competitors such as China, under post-1994 Republican policies.
Doesn’t the highest bracket pay 39%, thus leaving 61% – the greater part – in your pocket? That’s under the Clinton levels. Even when we taxed at 90% the superrich had more money than I would ever know what to do with. Plus, the American Dream is unfortunately just that, a dream, one that ironically was EASIER to achieve if anything when we had tax policies that fostered a growing middle class and upward mobility.
What matters is now and the future!
It can tell us what has worked and what hasn’t, though certainly nobody’s suggesting being a slave to it.
But I think talking about doing what FDR or anyone else did 100 years ago may be completely irrelevant. Telling me rich people paid x% in taxes in 1947… who cares. Want to go find some other things going on in 1947… how was the life of the average black person, what was our life expectancy, how much of our debt did China own, how many people played the stock market… it was a very different world so be careful with drawing parallels.
<
p>Actually, the highest bracket pays nowhere near either 39% or 35% (the highest current bracket) in income taxes. The effective rates — when you take into account tax loopholes, the lower capital gains rates, and the fact that only a portion of the income is taxed at the highest rate — is closer to 17%.
…that its the middle and working classes who feel like they’re really holding the bag. I couldn’t articulate it as well because I didn’t know the specifics, but this is exactly what I was refering to.
Don’t let the facts get in the way of your rant. Five years of service are required to earn a senate pension.
thank you for the correction.
5 years of work for a pension is still pretty ridiculous.
You only get a pension once you hit 62 years of age (50 if you’ve got 20 years of service, or at any age with 25 years of service). Furthremore, “the amount of the pension depends on years of service” so it’s not as if a 1 full term senator is getting a full pension.
<
p>Again, be less assumptive and cynical, and just read a bit more. It might shock you to see that Congress isn’t as craven as you’d like them to be so that you can rail against their cravenness.
…will almost always require five years of work to become fully vested in that pension. That’s how pensions work – you’ve apparently never worked in a job that offered one.
So you want to keep all of the money you make throughout your career/life? I don’t necessarily agree, but understand your point.
<
p>What I don’t get is that you then say how you have little faith there will be any SS when you retire. So let me get this straight..you don’t want the liberal government touching your hard earned dollars, but the second you retire you want to be able to collect SS?
<
p>How can you not see the completely hypocritical argument you just made? You want to know what “drives me up the god damned wall”…rational like yours.
<
p>PS – It’s the republicans who want to privatize social security too. If they had been in power in 2008 and done just that…no one would have SS!
What I said was that as a consequence of my lack of faith in social security 50 years from now, I would like the opportunity to be allowed to allot a portion of the money I am currently paying into it into an IRA, to ensure that at least SOME of the tens of thousands I will pay over my lifetime will benefit me.
Ponzi Schemes always work. Especially when the top of teh pyramid is larger than the bottom. Social Security will be just fine.
Not by design nor intent, nor is there someone at the top pocketing the money. Doesn’t change I don’t think it will be around in 50 years.
I am sick of listening to cry-babies complain about having to pay taxes. And I don’t care the slightest that you feel “offended”. All too often people from both the Right and the Left use that feeling of being offended as a badge of honor and a way to convince themselves of their moral correctness. It is far easier to feel offense than to actually consider that you might not be entirely in the right.
<
p>Yes, we understand you want to keep your money – we all do. But our society and government is not free. It has to be paid for somehow. And that has to be through taxes of some form or another. I am utterly disgusted by Republicans, Libertarians or even Democrats who are totally willing to put our country into crippling debt just as long as they save a little bit on their own taxes. You want to cut spending instead – fine – let’s hear a real proposal instead of mumbling and hand waving or pretending that proposals that cut spending by a tiny amount allow you to cut revenue by many times as much as you save.
<
p>The simple fact is that there is no realistic way to eventually get back to a budget surplus without eliminating the Bush tax cuts.
<
p>
Your self-righteous view that this money is “yours” because you “earned it” is an illusion that should be more offensive than anything you say offends you here. You earn this money because of all the money millions of people have invested in making it possible for you to do so, by building and sustaining a stable, high infrastructure, low crime, efficient country all around you, with reasonable laws relatively consistently enforced, contracts and courts that work, phone lines and roads to everywhere, educated people to do things… within this system, people earn a standard of living they couldn’t achieve in some other countries even if they had twice the ability and spent twice the effort.
<
p>Benefiting from all of this, you’d rather just take as much as you can get away with – taking from the people who gave to you to make your earnings possible.
<
p>Talk about about offended. Wow.
and it’s that money that we use to fund the low crime, high infrastructure, roads and other things, then wouldn’t the people I would “take as much as I can get away with” the wealthy?
<
p>Unless there’s a secret enclave of tax payers you know about that I don’t.
So first you condemn the idea that the wealthy should pay for the society and structure that enables them to be wealthy, but then you justify your attitude based on the fact that the wealthy pay for it? You can’t have it both ways. Is it right and proper that the wealthy – who are by far the main beneficiaries of the things our taxation funds – pay the bulk of the costs of our social and physical infrastructure, or does it offend you that people think they should?
<
p>Note that your statistic is highly misleading. What percentage of total wealth and resources do the top 25% have? It makes much more sense, in the context of this discussion, to look at what percentage of their wealth & income they pay in taxes, rather than what percentage of total taxes they pay. But nevermind that, because even with your misleading framing, your logic still fails. And your previously expressed offense is still IMO ridiculous, misguided, and not the honorable attitude you seem to assume it to be.
<
p>The fundamental reason that a job exists is to fill a demand. I don’t know what you do for work, maybe you wash windows. So let’s say that because of taxes, instead of washing 100 windows a week you decide to only wash 75 windows.
<
p>25 windows still need to be washed. Someone will wash them, won’t they? Do you want it to be you, or your competition?
<
p>Go ahead, cut back on the amount of work you do, that means that someone else will get an opportunity.
<
p>The new America: Don’t do your best so someone else has a chance.
<
p>
The slogan is “The Republican America: where the wealthy don’t do their best because they don’t want to pay more taxes”.
I don’t plan on working hard in the coming years to earn six figures and only bring home five.
<
p>That happens to be exactly what I do. And I’m OK with that. I get mine, Caesar gets his, the bills get paid, and I don’t have to live in a banana republic.
<
p>I’m going to bust my ass to earn my money.
<
p>I note the future tense.
<
p>Here’s a recommendation- spend less time on BMG. That’s I decision I made around Feb 1 (you’ll see I have about 14 comments post January; for context, you’ve had about the same amount since mid-November).
<
p>I don’t wish to criticize or judge those who choose to spend their time on BMG; it’s a fine thing to do.
<
p>But it’s not particularly lucrative.
Speak for yourself!
<
p>Jeeves, would bring me another sherry, please? And prepare the Bentley – the Rolls has been acting up lately.
<
p>;-)
The ones who generate most of your content for you- for free!
<
p>Brilliant!
FWIW, I really wish there had been a three year extension to take this important issue out of 2012 electoral politics.
Frankly, we get what we pay for. I am tired of pot holes, crumbling side walks, etc.
<
p>Mike Capuano’s point makes sense. Eabo attempted to hijack the thread (naughty, ergo my “3”) Your point that you would have preferred three years, so as to take tax restructuring out of “election year football” makes sense, I would have preferred all the tax cuts to expire as I view their impact on the economy as toxic.
<
p>And I say that as a “small business owner”.
…we just kicked it down the road. GOP got everything, but permanency. This is the President’s idea of compromise.
And what is worse than the extension of of the high-end tax cuts is the payroll tax holiday. As everyone should know by now, this sort of thing will itself be extended when it comes due. This would have enormous consequences for the viability of Social Security. Take a look at this analysis.
I hope this foolish compromise is rejected by Congress. Let all the tax cuts expire if this is what we have to give up. Until the Democrats can fight as hard as the Republicans, they’re washed up as a party.
Thanks, Congressman Capuano, for fighting this.
“C” corporations are taxed both at the corporate level and the dividend level, “S” Corporations are taxed at the personal level, the majority of small companies in the US are “S” corporations. It is very easy for capital intensive companies to have a large profit due to inventory increases and capital investment and have no cash.
<
p>Just as an example a small company purchases 100K of HVAC equipment, this will have to be depreciated over 29 years so the 100K HVAC investment appears as profit (assuming the company is profitable) and only a small amount is depreciated every year. Increasing the tax rates makes corporate capital investment much more expensive.
in the thread I posted above.
<
p>I told you last September, and I repeat it now, that you need competent tax advice. Your inability or unwillingness to do so does not have any bearing on tax policy.
<
p>Income of S-Corporations and LLCs passes through to their shareholders/members — after expenses. Payroll costs are expenses and always have been. Which part of the following is unclear to you?
This is different then cash. While the US government and GE have the ability to raise cash this is not true of small businesses. Small profitable companies can go out of business when faced with a cash shortage.
<
p>
Company makes $100, after expenses, and invests $100 in a new HVAC system.
<
p>Profit = $100 minus the depreciation on the $100 (about $3) leaving company with $97 of income on which owner owes about $34 in tax.
<
p>The problem is that the company only earned cash of $100 and spent it on the HVAC and now owes $34 in taxes. Cash he doesn’t have because he invested it.
<
p>That’s roarkarchitect’s point. He’s right; you’re not considering it. You needed the tax advisor.
firstly, because a number of bills have allowed for advanced depreciation. Secondly, because lots of capital expenses depreciate faster than 30 years. Thirdly, because if you’ve been investing in capital over the pas x years, you’ve got all those years of built up depreciations to take now. Using roark’s example, you might have $3 from the HVAC, $5 from the processing equipment, $4 from the roof, $8 from the coolers, etc. You’re not paying tax on $100-$3; you’re paying tax on $100-$3-$5-$4-$8, etc. If you’ve been pipe-lining your capital investments, you’ll get all those deductions in a regular, reliable increment each year.
<
p>P.S. We’d all buy more ‘capital’ without taxes. I’d buy a bigger home, maybe new appliances, furniture, etc. That doesn’t mean that we shouldn’t have taxes. We buy private stuff, but we’ve also got to buy public stuff. Including businesses, small or otherwise.
A growing, start-up company typically has cash flow problems because it’s reinvesting its profits into the business.
<
p>So, if its investment are depreciating over any useful life of anything over 1 year AND investing all its profits back into the business, taxes will hinder its growth.
<
p>P.S. If the government encouraged people to buy more capital, well, that’s a good thing. Bigger home, new appliances, furniture stimulates growth as does lower taxes. I never wrote that “we shouldn’t have taxes”. You did. I simply reiterated that the Representative’s view of businesss profits and taxes is exceptionally naive and frankly, ignorant.
So, I’ll do it again:
<
p>1. There are a number of tax provisions which allow for advanced depreciation. Some allow up to $25,000 (an automobile, Sec 179). Some allow 50% depreciation at time of purchase (MACRS). These dramatically reduce the impact of the example, as the tax on the $100 HVAC isn’t $34, it’s $17.
<
p>2. He used a 30 year example, which is extremely rare. Let’s instead use a 7 year example.
HVAC: $100
1st year: 50% MACRS, so you get to depreciate $50, meaning you pay taxes on $50, result: -$18.
2nd year: depreciate $8, meaning you get to reduce your tax burden by $3 despite not spending anything: +$3
3rd year: depreciate $8, meaning you get to reduce your tax burden by $3 despite not spending anything: +$3
4th year: depreciate $8, meaning you get to reduce your tax burden by $3 despite not spending anything: +$3
5th year: depreciate $8, meaning you get to reduce your tax burden by $3 despite not spending anything: +$3
6th year: depreciate $8, meaning you get to reduce your tax burden by $3 despite not spending anything: +$3
7th year: depreciate $8, meaning you get to reduce your tax burden by $3 despite not spending anything: +$3
<
p>Your cash flow as a result of the tax policy is -$18 the first year, but you get to depreciate the next six off as an expense, thereby reducing your profit (and tax burden) which completely offsets it. roark’s example is extreme because he assumed no MACRS and a 30 year depreciation schedule, neither of which are particularly common.
<
p>3. While plenty of businesses are in their first year, most are not. Most have been in business a few years, investing in capital each and every year. Assuming our example buys a $100 capital item with 50% MACRS and 7 year depreciation, by the time the business is in year 7 the prior six years’ depreciations will offset the burden of this year’s capital project, resulting in no net change of cash flow. None.
<
p>
<
p>I didn’t claim that tax policy had no impact on growth — of course it does. I claimed that roark’s example is one which happens to lie on the extreme side to favor his point of view. Lots of capital purchases have accelerated, front loaded depreciation. Lots of capital purchases depreciate far faster than on a 30 year time frame. Lots of businesses have made capital investments in the past number of years, allowing the depreciation from those years to reduce their tax burden this year too.
<
p>
<
p>P.S. Bigger homes require more fuel to create, maintain, heat, cool, and get folks to and from. I’m not so sure that, in the long run, big homes are good for our economy. At some point, it’s sinking a lot of resources into a product which just may well be making our lives worse, not better.
ALL Real Property and fixtures have useful lives of approx 30 year, and the section 179 doesn’t apply to real property nor fixtures thereto. 30 year is as commonplace as buildings and fixtures (i.e. HVAC).
But a small business having flow through income and no available money to distribute can happen in a lot of ways. The business can sell assets with a low carryover basis and reinvest the money in new assets. In that case the accellerated depreciation likely will not offset the gain. A small business could have cancellation of debt income for tax purposes despite no cash to distribute. The same scenario could happen with a tax credit recapture. It’s not the norm, but it’s not rare either.
<
p>The real problem is that Rep. Capuano’s post didn’t seem to take into account the many differences between C Corporations and flow through entities, a fatal flaw in his argument that comes through by offering various scenarios that show his argument to be wrong.
First, I’m not sure that this scenario is even slightly unusual, because, as noted above, real estate and fixtures are on a 30 year schedule, AFAIK.
<
p>Second, that negative number in Year 1 is the problem for smaller businesses, because they don’t have the liquidity to just absorb it, as a larger business (or one owned by someone who is actually wealthy). Being able to make it up later is of little consequence when the guy is looking to keep the doors open this week/month/year.
… we have a credit system? Isn’t that why we have IPOs?
And you have put your finger precisely on the problem. Businesses, like individuals, were over-leveraged (they had too much debt) in 2008, and still are.
<
p>In the wake of the financial crisis, banks have veered to the opposite extreme: credit standards have become very, very tight indeed. That is, the bank will lend at very low interest rates, but only if the borrower has perfect credit, and, significantly, a lot of cash flow (because they don’t trust collateral appraisals anymore). Which is a return to an earlier era: you can only get the loan if you don’t need it. Result: not very much commercial lending happening right now.
<
p>IPOs are lovely if the equity markets are favorable, but are not exactly an option for 99.999% of existing businesses.
<
p>This is why many small businesses are in the midst of a protracted cash flow crunch in this recession. And, at least in my view, why there is an awful lot of anger among the Chamber of Commerce types to the late Democratic regime, which they perceive to have stuck small businesses with an awful lot of bills.
<
p>For instance: (i) employers who do not provide health benefits will be penalized, as under the Romneycare that we already know in Massachusetts (if the government wants Susie to have health insurance, why doesn’t the government buy Susie’s health insurance, instead of requiring a business to do it); (ii) one way that the cost of the bill is reduced is an absolutely asinine change to the rules regarding IRS form 1099, which will impose significant paperwork burdens on businesses; (iii) the government subsidizes COBRA benefits, but requires the business (which had to lay the employee off) to fund the extended benefits, and get a tax credit later (an interest free loan).
… isn’t with the principals that were being argued above thread, but rather with the state of the economy. In normal market conditions these problems are much more manageable. This is an argument for stimulus with, if necessary, deficit spending. And I agree, we’d all be much better off with the streamlined paperwork and spread cost burden of a single payer system. Too bad GOPers can’t recognize fiscal sanity when presented.
that the “stimulus” can be funded through increased taxation, and that the simplest way for business to avoid paying these taxes is to simply hire more people. My point is that the economic conditions have squeezed businesses, particularly smaller businesses, pretty hard since 2008, and that the policies of the government over that time have made the problem worse, not better, for smaller businesses.
I believe the President has proposed write-offs for small business investing.
<
p>Also, a withholding helps people not spend too much so they don’t have enough to pay taxes.
is a compulsory interest free loan to the government. If done between private parties, the IRS finds that kind of arrangement illegal, and taxes “imputed interest.”
<
p>It has its utility in the context of individuals, but in the context of businesses, it is nothing other than the government generously spending someone else’s money.
The reason that taxes are withheld is that you owe income and other taxes as the income is earned. That is why there are penalties if you under-withhold. If you accept the fact that taxes are needed to pay for services, then it is not “someone else’s money.” Given that premise, why do you find it more acceptable for individuals than for businesses?
If you are self employed, you are allowed to make estimated tax payments in advance, but do not have to provided you are ready to pony up on April 15.
<
p>You get penalized for underwithholding because you are failing to withhold as the EMPLOYEE directed you to, not because they already owe that money.
<
p>Married people with 15 little deductions running around can be withheld at Single-Zero. Single people can demand that extra withholding be taken out. I, myself, withhold my W-2 income at an additional rate than I have to as a sort of Taxes Christmas Club, to offset my self-employment income. But I don’t OWE that money until the year is over.
If I have nothing withheld and I owe a lot of money on April 15, then I have to pay a penalty.
Generally, you can’t make one payment on April 15 of the year after you earned the income and avoid a penalty for understatement of estimated tax. Also I don’t think you can reduce the amount of tax withheld by your employer to zero and then write a check to the gov’t at the end of each quarter, since the only way to achieve this would be to overstate the number of withholding allowances to which you are entitled.
You CAN overwithhold, but cannot go in the other direction.
<
p>But I’m not sure about quarterlies. For example – do those on unemployement have to pay quarterly tax? By Kate’s theory, they ‘owe’ as soon as they get the check. Do Tupperware vendors or contract workers have to pay quarterly? All the IRS language says you MAY, not must, be assessed a fine if you owe more than $1,000 in taxes (not get more than that in income, but owe as taxes). But if you owe less in taxes for self-employment income?
<
p>Not clear. But if you pay in full April 15, all is forgiven.
The IRS phrases it this way:
The tax codes are written to ensure that you pay tax as it is earned. This is on a paycheck basis for wage and salired employees. I stand my my phrasing that taxes are owed at the time they are earned, in the context of refuting CMD’s assertion that it is an interest free loan.
Taxes are owed when levied, as noted below. Further, I am not talking about withholding the employee’s money, which is their business.
<
p>Indeed, I am not even talking about a withholding at all. Instead, the government decided to expand COBRA benefits, but didn’t want to pay for it up front. So, they require the employer to pay for it, and the employer gets a tax credit to be used later. So, you’re struggling, and lay off employees to cut costs. Or, you fire someone because they are a bad employee. Then you discover, hey, you have to pay for their COBRA coverage! But the government will gladly pay you Tuesday for your funding of their program today.
<
p>That is a compulsory interest free loan, and I can tell you, anecdotaly, that this provision alone did the Democrats an enormous amount of damage in November.
From a small business perspective, while GM and BofA were getting bailed out – the Federal Government was getting an interest free loan from small businesses to pay for the COBRA expansion.
<
p>BTW the regulations didn’t even come out until the law went into effect.
that people who INTENTIONALLY OVERWITHHOLD in order to get a tax refund are indeed making an interest free loan to the federal government BY CHOICE. People who plan their withholding carefully to ensure that they have met the minimum withholding are simply complying with tax codes and the “pay as you go” regulations that are part of our tax codes.
…involved in ‘withholding’
<
p>1. calculated estimated earnings and deductions
<
p>2. amortize according to your payroll schedule the amount(s) from step 1
<
p>3. wait several months.
<
p>4. calculate actual earnings and deductions
<
p>5. compare amounts in step 3 and step 4, pay or collect the difference
<
p>You’ve succeeded in perceiving operational inefficiency as a moral wrong and, it appears, you take that personally. If you shrink the time in step 3 from months to days, or even minutes then we’re approaching operational efficiency. Someday computers will allow us to do this, but that day isn’t here yet.
<
p>
<
p>And the more generously they spend the better my children are educated, the safer my streets and the less I worry about fire consuming my entire neighborhood… If it is my money, and that’s how I want it spent… where’s the problem?
For those who literally pay themselves, using S-corps, a different approach works just as well (and was perfectly legal in the 1990s according to my tax advisor, who knows about today):
<
p>1. Estimate your total gross income — for executives in high-revenue businesses, set this at least as high as the FICA ceiling.
2. Calculate your total annual tax and FICA exposure. Keep this current, based on actual revenue receipts, as the year progresses.
3. Draw cash from the company as desired during the year. BE SURE TO KEEP A TAX RESERVE (see step 4) of at least the amount calculated in step (2).
4. In December, make a single W2 payment in the amount of the total annual tax and FICA withholding, deduct 100% of it, and make an immediate form 941 payment to the feds and state of the total annual withholding. Use your tax reserve from step (3) to make the payments.
5. In January, issue a W2 to yourself reporting the total annual income calculated in step(1) (including the amount listed in step 4) and reporting the total withholdings from step (4).
6. In March, file an 1120S showing any remaining pass-through income (or loss) on a K1 to yourself. That pass through then appears (in addition to your W2) on your personal form 1040. It should be quite small.
<
p>The government is happy, you’ve paid your taxes when due (report your salary as an ANNUAL salary), and you’ve had full use of the withholdings during the year. Since you pay all taxes due through the withholding system, you have no estimated tax exposure.
<
p>
The law appears to presume withholdings are pro rata throughout the year and affords taxpayers the opportunity to show otherwise, but surprisingly doesn’t seem to give the gov’t the right to argue against the presumption.
I think that you are referring to “phantom profits.” This happens when a firm sells, and then replaces, inventory and the cost of the inventory is rising. So if it buys a widget for $6, and then sells it for $10, it pays taxes on the $4 of “profit” even though it must buy a new widget to sell for $10 and so no cash is left over.
<
p>The capital investment/depreciation problem likewise arises due to the rising replacement cost of the asset, and is more likely to actually happen because the replacement cost of the asset increases. For example, the HVAC system installed today might cost more than the one installed in 1980: perhaps because of new technology, because of the computers needed to run the system, or because regulations require this or that energy saving or renewable energy features. So the firm depreciates the system based on historical cost, and pays taxes on the “profit” if any, but must save those “profits” in order to replace the HVAC system. Any of those “profits” spent to replace the capital asset over and above the depreciated cost of the old asset are indeed completely illusory.
<
p>So increasing the tax rates can make capital investment more expensive, but I’m not sure if it is “much” more expensive.
<
p>The primary problem with the original post is that it presents the false choice of taking a distribution or hiring new people. (Gee, if they’re so concerned about taxes, hire people!) This ignores the other costs associated with hiring someone: you are required to buy health insurance, which is ever more expensive, then unemployment insurance, worker’s comp, etc.
<
p>I can tell you that the single biggest factor that has discouraged the firm I work for from hiring new people during 2010 has been the stimulus bill. The stimulus bill provided a “federal subsidy” for COBRA benefits for laid-off employees, but in a gimmick typical of that crappy stimulus bill, required the employer to front the money for the subsidy. The employer gets a credit for this interest-free loan to the government on its taxes, but a tax credit is cold comfort at a time when the firm’s biggest problem is maintaining sufficient cash flow and liquidity to operate– especially when the carry-overs from 2009 mean that there wasn’t much tax owed in the first place. So, my employer has decided that it can’t replace the employees laid off in 2009, even though 2010 was better. Instead, it has chosen to demand more from those that survived 2009, both in overtime and efficiency, and is looking to make capital investments (with predictable cost) that will reduce the demand on existing employees without requiring new hiring.
Dear Congressman Capuano:
<
p>There in a proposal in the United kingdom called “The Robin Hood Tax”. It would tax investment companies .05% on profits from trades such as stocks or bonds to do good in the country and abroad. If passed, it could generate 100 to 200 billion pounds a year to create renewable energy projects and do social good there and across the world.
<
p>Firstly, have you heard of the “Robin Hood Tax”? Secondly,would you forward such a proposal here in the United States if it could generate hundreds of billions of dollars to help our struggling schools and generate renewable energy and do good here and abroad?
<
p>Respectfully Submitted,
Sincerely,
Wayne J. Wilson, Jr.
Roslindale
<
p>
And a tax that regular people don’t have to pay- it comes out of some magic banker’s pocket! Because everyone knows that draining 200 billion dollars out of the pockets of banks does not affect the underlying economy where those banks operate.
is inaccurate. As roarkarchitect notes, this explanation only applies to C Corporations. Most “small businesses” are not organized as C Corporations, instead as S Corporations, partnerships, or LLCs. That means the owners will be taxed on the flow through profits of the business, not just the salary and dividend distributions. (In fact, S Corporation dividends are not even taxable if they come out of the AAA account since they were already taxed when they flowed through).
<
p>The real argument is that if the tax rates increase and a small business owner wants to take home the same amount of money, then the small business owner will have to take more money out of the business to pay the higher tax amount and still end up with the same amount in his or her pocket. A common place to look for savings for small business owners is the salary of its employees. Therefore, small business owners might decrease the amount the business pays in salary to its employees so the owner ends up with the same amount of money at the end of the day.
<
p>I think its very difficult to measure whether this scenario will, in fact, occur. I’ve seen estimates of how many small businesses will be affected based on schedule C or schedule E of the 1040, but either method is both under- and over-inclusive depending on the facts of each taxpayer. But the scenario is plausible, even though its very difficult to determine how many taxpayers fall within it. I think pretending that the scenario can’t exist, as the Congressman does here, is as unhelpful as pretending that the scenario will always exist, as some Republicans have argued.
Coming from the right, I don’t think the small business income argument is very strong. We remember how the 2001 tax rebates and income tax cuts didn’t make much difference in the economy.
<
p>The increase in capital gains and dividends taxation from 15% to 39.5% is the major destructive action of eliminating the Bush Tax Cuts. These were enacted in 2003.
<
p>Increasing investment taxes will hurt small business by eliminating the avenue for them to get investment, either by the owner or by venture capitalists or other investors who might earn over $250K in income per year.
<
p>Workers get hired by companies which make things people want to buy, and can sell them at a profit at a price other people can afford. The way to increase salaries and wages at these companies is to more efficiently connect capital and labor.
job creation, and never have. They certainly didn’t when the misnamed “American Jobs Creation Act” (which was a tax holiday for MNE’s, remember?) was enacted.
<
p>All my life, I’ve never seen anything that creates jobs but one thing: having more work than your current staff can handle. To link taxes to job creation is creating a false linkage which has no basis in the reality of business, and I’ve helped create 4 businesses. Whatever the tax rate, business can easily manage their tax burden by managing expenses. We see compelling evidence of this in the fact that all corporate tax revenues in 2009 totaled less than one quarter of tax revenues from individuals.
<
p>The linkage of taxes to jobs is false, and always has been.
I am a small business. My problem is not taxes, not in the least. My problem in cash flow is WORK. When I have more of it, I hire. When I have less of it, I don’t, or let go of help or reduce hours/pay of employees.
<
p>END of story.
If you’re a small business of any significant size, you’re probably putting away about 1/3 of the profits to pay tax. And, simultaneously worrying about remitting the employees payroll tax.
<
p>It seems obvious that planning for the savings and remittance of a cost that is equal to 1/3 of your total profits ought to be a pretty serious priority and for most small businesses paying attention to that priority is typically a problem.
… the solution to her problem really is customers. Just like the rest of the economy.
That’s assuming a 40% tax rate on a net profit of 3.5% – which is pretty typical. With a net margin, you’re talking 2% of revenues.
<
p>I’m not minimizing the effect of taxes on small businesses – it’s likely in the top ten critical issues for a mature small business with reliable profits (less so for new businesses – the real engine of job growth – which often pay no federal income taxes because they have no net income). However, it’s 1.5% of revenues.
Is there anyway you could invite yourself onto CNN and Fox News and make that very case? The morning shows on MSNBC need a little help too.
<
p>I believe that Main St America had no interest in extending tax cuts for million/billionaires. Why President Obama is allowing this to happen is beyond me. If he couldnt’ get the extention for the middle class only, then he would have served us better by allowing all of the tax cuts to expire. Then he could have explained why that happened and demanded new tax cuts for the middle class only. This success for the Republicans will get quietly swept under the carpet and won’t be brought to light again until 2012. By then, our economy is going to be in a much worse place. Who knows how many increases in regressive taxes we will face, which will also be factor in 2012.
<
p>I honestly don’t get what’s going on. It’s too hard to believe that they are this stupid. There must be something else going on that we just can’t see.
…that Main Street America has no interest in these cuts. There’s actually evidence to back this up. According to a CBS poll refered to on TV last night 67% of Americans wanted tax cuts only for the middle class, broken down to 84% of Democrats, 62% of Independents, and 52% (yes, slight MAJORITY) of Republicans. What was that the GOP was saying about listening to the American people?
<
p>People making $251K are NOT Millionaires or Billionaires.
I had the problem of making over $250K and having a higher tax bracket on income over $250K! What a problem to have!!
that people making more money than “they” make are enjoying wealth. Haven’t we all been there? Didn’t you ever make $25K a year and thought if you could make $35K, all your dreams could come true? Then when you make $50K, you work harder hoping to make the next plateau and become “rich”…
<
p>One solution could be creating more levels of household finance. Right now it seems like we have poor, middle income and rich. But much of the debate has been the line of delineation between middle income, upper middle income, rich and the super rich. I think is disingenuous or maybe even a “lie” to talk about raising taxes on people making over $250K and then in the same sentence justifying the increase by saying “millionaires and billionaires” can afford it. Whether you like it or not, people who make $251K are not necessarily millionaires.
<
p>So maybe we need really poor, poor, somewhat poor, lower middle class, middle class, upper middle class, almost rich, rich-like, rich, very rich, super rich and ultra rich.
But they’d also only have to pay $86 more per year if the tax bracket above $250K relapsed to 39.6%.
that I had accepted the $1,000,000 cut off for tax increases as a reasonable compromise.
Such a naive post.
<
p>
<
p>or
<
p>
<
p>Or here’s an option or two for those business profits: invest in plant, property or otherwise productive equipment. Or, when the entrepeneurs “take that money out” it ends up invested in banks, invested in the stock or bond market which helps other businesses which require capital, or option 3, the person simply spends the money on consumable goods.
<
p>Or, in your mind, how about option 4, give more to the government: The ONLY result of that proposal is to encourage government departments to simply pay themselves larger salaries at a lower tax rate – not grow our economy. How does that help America?
<
p>In short, the money “taken out,” contrary to your simplistic post, doesn’t just disappear.
Invest that money in expansion overseas – especially in jurisdictions with more enlightened pro-business tax policy.
Only fairly large businesses can afford to expand operations overseas, and when they do it is usually for cheaper labor, not lower taxes. What countries are you thinking of, anyway?
Ireland was experiencing tremendous economic growth (until bank bailouts killed their economy) due to having the lowest corporate tax rates in Europe. A huge number of European multinationals relocated their HQ’s to Ireland for this reason.
<
p>Many large companies offshore profits to ta havens like the Cayman Islands.
<
p>Singapore is experiencing tremendous economic growth because they cap their corporate tax rate at 17% – but they tax “foreign-sourced income brought into Singapore” at a much lower rate – often not taxed at all.
<
p>There are legal ways to change where profits are realized. There are costs to setting up these structures – but as corporate tax rates get higher it makes sense to set these up.
<
p>As for hiring foreign workers – expansion is more than just setting up a subsidiary and hiring locals full time. Many small businesses outsource services overseas – from call centers to accounting services to radiology. Part of the savings is from lower labor costs – but the cost of labor is leveling world wide. Part of the savings comes from not having to pay health insurance, unempoloyment, payroll tax and other taxes associated with hiring employees.
<
p>There are fixed costs to managing all the red tape. I’ve run small businesses where I was hiring overseas contractors because it was both cheaper and had fewer regulatory headaches.
…easily equals less enlightened social justice policy. I know which one I would take, as long as the latter includes disincentives for taking advantage of the former.
…simply for calling a member of Congress naive. I’m pretty sure I’d trust him over you to know what he’s talking about.
<
p>
<
p>Really? You’d trust a Rep over an anonymous typed post on the internet. Revelation.
<
p>And what, by virtue of being a Representative he’s removed from the criticism of being naive?
<
p>Above he says, “The ONLY result of their proposal is to encourage wealthy small businesspeople to simply pay themselves larger salaries at a lower tax rate – not grow our economy. How does that help America?”
<
p>The telling question is this, will he support the current tax compromise, which absolutely gives an extension of tax rates to all income classifications including those “wealthy small businesspeople.” If not, he’s naive, not recognizing the benefits of lower rates to business, if so, he’s not voting his conscience.
<
p>An odd comment, here a Representative who’s never taken a position or rendered any meaningful thoughts on taxes over his career, suddenly explaining ‘tax 101’. Wonder if he’s actually taken tax 101?
Member of the Congress over anonymous blogger – easy choice all else being equal. I’m sure he knows more than you do; I KNOW he knows more than I do.
<
p>Vin Cerf invented the Internet, but Al Gore made certain it was paid for.
<
p>Without those tax receipts paying for, first, defense spending (darpa) then science (NSF) and later a smooth and equitable transfer to private ownership, you’d still be pishing away on a dial-up BBS at 9600baud…
<
p>Unless, of course, you want to argue that the internet has nothing to do with the economy. Good luck with that…
<
p>I’ll argue that market capitalism actually hindered the growth of the internet: Microsofts’ rigid hold on the desktop and the resultant monopoly they used to crush Netscape (and others), in concert with the abysmally poor engineering of their computers (responsible for more downtime than influenza and hangovers put together…) has held us back.
Thanks for the anecdote.
<
p>Here’s one. A GAO audit of the Dept of Defense uncovered approximately 270,000 commercial airline tickets at a total cost of $100 million that went unused even though they were refundable.
<
p>Unless, of course, you want to argue that money wasted by the Government has nothing to do with the economy. Good luck with that…
<
p>I’ll argue that the lack of government oversight actually encourages the unfettered growth of the government: the government’s rigid hold on budgets that continually grow and never shrink even in recessionary times.
<
p>But of course, that’s an ancedote, and as useful as your comment, which also was.
<
p>
Government Accountability Office…
<
p>
<
p>How very… meta… of you: The government finds out that the government (at least once) wasted some money and you use that to support your argument that the government (always) wastes money and can’t be trusted to police itself.
<
p>That headache you’ve had for the passed decade is called ‘cognitive dissonance’. It’s made you cranky.
What part of ‘anecdote’ are you missing?
<
p>
<
p>And you point out that the government (at least once) invested in a program that became commerically successful and you use that to support your argument that the government never wastes money and can be trusted to spend wisely.
Thanks for all the input and commentary on my post. I intentionally simplified the problems associated with this proposal when I drafted it. I was a tax lawyer for many years before serving as Mayor of Somerville and sometimes write about these issues from a tax lawyer’s perspective and not the perspective of the average informed voter. I didn’t want my point to get lost in too much tax verbiage. I haven’t done the work for a while but the broad strokes have not changed. By the way, my wife is a practicing CPA – and she did encourage me to be more detailed, but I resisted so that intelligent people who are not tax experts could engage … and judging by the many comments I think that happened. So thank you all again, there is a great deal of detailed and interesting commentary here and I enjoyed reading it.
Thanks for the thread, and thanks for the followup.
<
p>This community has a great many things to discuss between now and November of 2012, and I hope you will be a frequent contributor.