With all the hype from the McCain camp that Obama's tax plan will hurt small business owners, I went and actually looked up the math. I know. I know. HOW DARE I actually try to bring facts into the equation. The nerve of me!
McCain Theory: Small Business owners create the majority of the jobs in this country. Obama's tax plan to raise taxes on people earning over $250,000 hurts small business. Therefore, people making over $250,000 a year deserve more tax breaks in order to encourage businesses to create more jobs.
The McCain theory makes two assumptions:
*Assumption One is that the people who earn $250,000 are in fact small business owners.
*Assumption Two is that, if they are paying lower taxes on their personal income, they will hire more people in their business.
First, we need to determine if the First Assumption is valid. And before we do that, we need to define what qualifies as a small business. According to the Small Business Bureau, a small business is an independent business with fewer than 500 employees. By "independent" we mean sole proprietorship or limited partnership. Corporations are not included in this definition. This is when I realized how damn hard it is to find solid data that wasn't corrupted by spin from either side. I ruled out data from blogs, or anything that seemed to be a special interest group. So I started with the career sites to see what they were reporting.
Payscale.com-The average small business owner reports a yearly salary of between $36,000 and $75,000 a year.
Careerbuilder.com-Reports the average Small business owner salary is $36,266
Of course, these sites depend on user imput, so it may not be accurate. So I went to the government sites.
This is a cumbersome report, but I encourage you to read it anyway. Not one category is showing an average income of over $250,000 a year. Doctors, lawyers, engineers, and sales managers show an average in range of $100,000-$150,000, but not near $250,000.
FINALLY, digging around the U.S. Census site. The 2007 report of income by source of income!
The report shows number of individuals reporting a type of income (keep in mind, the number is in thousands. Don't read it as is), and my median income. Almost 12.5 million people filed self-employment income (only looking at non-farm income, as farming has its own set of subsidies and tax laws different from other businesses). The average amount of self-employment income reported per taxpayer is $31,246
That is the number we are looking for, because the majority of small business owners that file report self-employment income. So it appears that the average income of a small business owner is well below $250,000.
So First Assumption is broken. The Obama plan will NOT hurt the typical small business owner.
Now let's look at the Second Assumption. Will giving tax breaks to people making over $250,000 a year encourage them to create more jobs? This assumption assumes these individuals are making their money in fields that would in fact lead to job creation. According to U.S. Census reports 1,324,000 reported incomes above $250,000.
So who are these 1,324,000 people?
Again, it's hard to narrow it down. Most of the statistical charts deal in median income, which means it throws out the top and bottom wages to calculate the average. So perhaps we have to go with our collective knowledge. What groups can we identify, off the top of our heads, that earn $250,000 a year?
Entertainers and Athletes. These guys are pulling down millions (OK, not the D-list actors, but you know what I mean). Does giving them a tax break generate more jobs? Does reducing their tax bill by, on average, $15,000 a year, create a new job? Or does it buy another Rolex? Or, on the other side, does increases their taxes by, on average, $23,000, destroy an existing job? They might have to fire their housekeeper or gardener...no, that would mean they would clean their own houses or mow their own yards. Besides, most of the Hollywood types are supporting Obama anyway, so obviously they aren't concerned about the $23,000.
Corporate CEOs. Not the guy who incorporates his business and gives himself the title to sound important. We're talking about the big boys from the big corporations. These are the guys running those big banks, mortgage lenders, investment firms, and such that the taxpayers are currently bailing out to the tune of billions of dollars. These are the guys that make the decisions to move jobs overseas, close plants, and fight giving employees a living wage. Will putting an extra $15,000 on average in their pockets suddenly inspire them to move jobs out of China and back to the U.S.? Or will increasing their taxes on average $23,000 help offset some of the economic problems their lack of forethought caused?
Health Care professionals and attorneys. While the median doctor income is around $150,000, some earn hundreds of thousands of dollars. Now don't get me wrong, I respect the work these folks do and believe they earn that money. But will giving them a $15,000 tax break create a new job?
Marketing/Sales professionals. Though the median income for these folks is around $90,000, those that work for the major firms can pull down MILLIONS! Of course, their income depends on the average American being able to afford to buy the stuff they are marketing. When the economy bottoms out, these guys stand to lose a lot. So will giving them a $15,000 tax credit save their jobs? Or would increasing their tax by $23,000 in order to provide a tax credit to the middle class actually help them make MORE money, because the average American would have more disposable income to spend on Xboxes, clothes, and cars?
Investment Brokers and Speculators. Have you seen the chaos on Wall Street lately? Would giving them a $15,000 tax credit fix the problem? Enough said.
The Wealthy. The folks who come from "Old Money." Those that inherited money from their families. The select few like Bill Gates that pulled themselves up and launched their own empires. Will giving any of them a tax credit inspire them to do anything they aren't already doing? The wealthy that already give back to the community will continue to do so. The wealthy that do not will continue not to. A tax break is not going to change the behavior of either group. Neither is a tax increase.
In short, Obama's tax plan does NOT hurt small business owners. In many cases, it would benefit small business owners directly and indirectly. The typical small business owner would qualify under the Obama tax credits, and the millions of other Americans that get the credit would have more disposable income to spend at their businesses.
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Comments: 43
Julie I would agree with your assessments.
Great article.
Obama's plan the number is almost 25 K before any taxes are owed.
Note, we are talking about PERSONAL INCOME, not business income. So please cite a source.
This is the problem, gut feelings, because people have bias, and you're bound to have them, is not a replacement for facts.......well, unless you're a wingnut, I guess.
FactTaxes on small businesses could be as high as 62.3%: Most Americans would agree that paying more than 50 percent in taxes is simply too much. Yet, Senator Obama’s plan calls for tax increases that would raise total tax rates to well over 62 percent for millions of small businesses.
: Under Senator Obama’s proposed plan, “The top 35% marginal income tax rate rises to 39.6% adding the state income tax, the Medicare tax, the effect of the deduction phaseout and Obama’s new Social Security tax increases the total combined marginal tax rate on additional labor earnings (or small business income) from 44.6% to a whopping 62.3%.” (Michael Boskin, “A Closer Look at Obamanomics.”)
Fact: "The business income from sole proprietorships, farm proprietorships, partnerships, S corporations, etc., is all taxed at the owners' individual income tax rates. This year 34 million business owners are expected to receive this type of income and pay tax on this income through the individual income tax. These businesses are typically small and often entrepreneurial in nature, and a source of innovation and risk-taking in the economy. Moreover, these business owners are frequently subject to the highest individual income tax rates." (" Topics Related to the President's Tax Relief," U.S. Department of the Treasury, May 2008)
Fact: “About one-third of the workers affected by raising the Social Security earnings cap would be small business owners." (Michael Tanner, "Keep The Cap," The Cato Institute, www.cato.org, 6/8/05)
The “death tax” tax will rise from the grave: Under Senator Obama’s plan, death tax will rise again from the dead.
Fact: Since the estate tax was addressed in 2001, “death” tax rates have been dropping and will be all together repealed for in 2010 for just one year… unless Congress acts. Rather than keeping the repeal in place, Senator Obama has proposed reinstating the tax at a rate of 45 percent for estates valued over $3.5 million – this isn’t just the rich guy down the street. Many small businesses and family farms that have been passed down for generations will be hit by this tax.
www.rightchange.com
That's what I said. And if you look at the income reports, these people so NOT makw over $250,000 a year.
“The top 35% marginal income tax rate rises to 39.6%
1. It would only "raise" on those making over $250,000 and
2. It isn't a "raise." The Bush tax cuts are SET TO EXPIRE. Obama said he will not renew them. It isn't a raise, it's reseting back to what they were in the 90's. You know, during the Clinton administration when the economy was ADDING tens of thousands of jobs a year and we had a budget surplus?
I am confident that your facts are completely accurate and also that you looked them up with complete objectivity. However, facts are stubborn things. We are not talking about tax breaks, we are talking about tax increases. I called my cousin in up-state NY who owns a small business that makes more than $250,000 and she will be affected. My wife and I are not hollywood entertainers, star athletes, CEOs, or any of the other categories you list to exaggerate the point of who makes more than $250,000 and what you think they should pay the federal government in taxes. We are both lawyers, from blue-collar families who owe lots of money towards student loans we had to borrow in order to go to college, graduate school and law school (more than $182,000 total). We also have 3 daughters under 6 who we would like to provide for and who we would like to be able to send to catholic school and college, and a mortgage that we are paying without the help of US tax dollars. In addition, you might want to know that those who are in the top 1% of wage earners (more than $350,000 per year combined household income) pay 40% of all taxes and the bottom 35% pay ZERO. Not everyone who has money inherited it, some worked for it. And even though I would have liked to have been born into money, I think it unwise and unhelpful to try and divide the country by making everyone who has less want more from those who have it. My wife and I are very generous towards our own families who have little, and I think it better that families help one another rather than asking the federal government to be the middle man to collect and redistribute.
Thank you!
A PERSONAL income is NOT the same thing as a business revenue.
A PERSONAL INCOME is, well, personal. It's what you use when you use to buy your food, pay your bills, send your kids to collage, you put in your savings account. Most people in America do all that on less then 35K a year.
PEOPLE who make over 250k a year will have to pay higher taxes.
A Business revenue is income made by a business. This is what a business makes after they have payed their employees, owners, ceos, whatnot, and have taken out what they paid for their merchandise or product. This is the money they use to help their business grow by creating more jobs and procuring more merchandise or creating more product (which will make more jobs - go figure.)
A Business making 250k a year will likely get tax breaks and credits under Obama, because they will be creating more jobs.
jeff
Unfortunately we have to keep cramming the facts down their throats or they will find a way for pepole like Sean Hannity to out shout us.
The earnings on both are passed to the owner(s) for tax purposes. It doesn't matter what you keep in retained earnings or pay others. If the net income before tax, which is what is left after all expenses including depreciation, wages, etc., is $75,000 and the owner takes $50,000 as a salary and keeps $25,000 in retained earnings, his individual taxable income is $75,000.
Therefore it appears to me Julie's analysis is essentially correct regarding the salary, and tax rates of small business owners.
BTW I own a Sub-S Corporation so as much as I hate to say it, most tax abuse comes from small business owners that over-deduct many expenses such as automobile, travel, supplies & equipment, as well as under-report income especially if it is in cash. Also small business owners often evade paying payroll taxes on their own salary by taking a small salary and the rest in cash draws.
Secondly, in trying to identify who these people are that make more than $250,000, you go through a list of different occupations, corporate CEOs, athletes etc. and make comments about them. Comments are not proof. And you do not even mention small business owners in your list so by definition they are excluded!
I sell small businesses and have been doing so for 25 years. Most business owners do not make $250,000 per year, but the successful ones do. actually the successful ones make a lot more than that. I know this from years of experience working with these companies. The successful ones of those that are inventive, who have found new markets, who are producing new products, or introducing a new service, or a cheaper way of doing things, or a better way of doing things, etc. There is simply no way to grow a rapidly expanding business without hiring people. Period.
And by the way, the business does not pay the taxes, the owner pays the taxes. Almost all small businesses are LLC's or sub-S corporations. The owner must pay taxes on the profits.
By the way, 70% of all new jobs are created by small businesses. So the question is really -- do we want to raise taxes on the most successful small businesses, those creating the most jobs?
They probably make more.
Those who are successful make more money than those who are not. Why should those who work hard, do their jobs, and make more money be effected??? I guess we are justifying Robin Hood's plan to Steal from the rich and give to the poor?
JUST BECAUSE PEOPLE MAKE MORE MONEY THAN OTHERS DOESN'T AUTOMATICALLY IMPLY UNFAIRNESS PEOPLE.
I live with a family of seven with an income of 80,000 a year. Just because my parents are not making the same amount as someone who makes 250k doesn't mean i have to be sour about it.
Besides, the businesses who are being taxed up the skirt have to raise some of their prices in order to keep balance. BUT, BUT, BUT, What does that mean for us???
That means a little more comes out of our lower to middle class pockets my friends.
Anyone with half a brain could understand that.
I feel bad for the youth and the future that awaits me....HONESTLY.
How are they supposed to understand morals and ethics when they're surrounded by adults who can't even understand the process of HARD WORK = REWARD.
Kids my age get their ideas about politics from MTV and anyone who has a blog...
So congrats on your facts and statistics, but the whole idea of the article just doesn't follow.
But, who cares what i have to say about it...
I'm just a kid.