Obama's Tax Plan...and Small Businesses

Obama's Tax Plan...and Small Businesses

by Marilyn Mackenzie

It bothers me that Obama wants to raise taxes on businesses and families earning over $250,000. 

We could argue for decades about whether or not he's actually raising taxes on those with lower incomes.  I believe he is, since he's doing away with the tax relief offered under Bush.  Most Republicans see it that way too. 

We could also argue for decades about whether or not $250,000 represents the so-called rich persons in our society and whether or not the fact that they can supposedly afford to pay more should be a reason to tax them more. 

But I want to talk about the small businesses.

One Gatherer made a comment not long ago that "most small businesses earn less than $250,000 so this won't affect them."   Having had my own small business, and knowing what my gross and net incomes were, I found that a strange comment and didn't believe it.  I remembered when my son's dad was researching purchasing a small bar/restaurant twenty years ago and what the owner quoted as the gross and net incomes.  I decided to do some research about current trends and incomes, and I found that many small businesses do, in fact, earn more than $250,000, as I had imagined.  And once you add the income made by the small business to any other income made in the family (like the spouse with a 'real job') there are lots of families earning over $250,000.

While I was doing that research, I discovered a few forums for small businesses and read through the posts there.  These people are worried, and many say that under Obama's tax plan, they will have to lay off workers or even close down.

Here is one of those forums.  I think there are six pages on this topic that you could review if you wanted:  Obama taxing small business owners There are others out there, if you wanted to do some research on your own.

In this particular forum, they mentioned an article by Grover G. Norquist.  Here's some of what Norquist said: 

The Obama campaign maintains that the number of small-business owners is what's important. Economists know what matters is the tax rate that's applied to the bulk of small-business income. Make no mistake about it: Obama's plan to raise taxes on households making more than $250,000 will raise taxes on most small-business profits in America.

What type of tax rate are we talking about? Currently, S corporations face a top tax rate of 35 percent, while sole proprietors and general partners face a tax rate of 37.9 percent (since they're responsible for paying both income tax and the Medicare component of the payroll tax).

Under Obama's plan to let the scheduled 2011 tax rate hikes occur, and his plan to raise the self-employment tax on those making more than $250,000, the S corporation rate would rise from 35 percent to 39.6 percent. The sole proprietor and partner rate would rise from 37.9 percent all the way up to a staggering 50.3 percent. Many Democrats in Congress have proposed making all small businesses (including S corporations) pay this 50-plus percent rate. A small business tax rate that high would be the highest marginal rate faced by them in nearly a quarter-century.

To read the entire article, click here:  An argument against Obama's tax plan

My first question is this:  Did you realize that Obama's tax plan could mean that a business sole proprietor and partner could rise from 37.9 percent to 50.3 percent?

My second question is this:  Do you think this will cause businesses to downsize or close? 

And my third question is this:  Do you care?   

As a reference point, the Small Business Administration website lists these statistics:

Small businesses:

• Represent 99.7 percent of all employer firms.
• Employ about half of all private sector employees.
• Pay nearly 45 percent of total U.S. private payroll.
• Have generated 60 to 80 percent of net new jobs annually over the last decade.
• Create more than half of nonfarm private gross domestic product (GDP).
• Hire 40 percent of high tech workers (such as scientists, engineers, and computer workers).
• Are 52 percent home-based and 2 percent franchises.
• Made up 97.3 percent of all identified exporters and produced 28.9 percent of the known export value in FY 2006.
• Produce 13 times more patents per employee than large patenting fi rms; these patents are twice as likely as large firm patents to be among the one percent most cited.

Source: U.S. Dept. of Commerce, Bureau of the Census and International Trade Administration; Advocacy-funded research by Kathryn Kobe, 2007

The SBA site also states that, "Very small fi rms with fewer than 20 employees annually spend 45 percent more per employee than larger firms to comply with federal regulations. These very small firms spend four and a half times as much per employee to comply with environmental regulations and 67 percent more per employee on tax compliance than their larger counterparts."

The SBA defines a small business as one with fewer than 500 employees.  In 2005, there were approximately 25.8 million businesses in the United States, according to Office of Advocacy estimates. Census data show that there were 5.8 million firms with employees and 18.6 million without employees in 2003, the most recent year with data.  Many of those 18.6 million "businesses without employees" are probably your local Avon and Tupperware sales persons who have to file as businesses, and probably do not make over $250,000.  But some of these businesses do, or their families will earn over $250,000 when you combine the business income with any other family income (like from the working spouse) - and since the increases in personal taxes are for families, this will affect those families.

 

 

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As I pondered all of this, you know what bothered me?  The number of persons who do not pay taxes.  I personally know three men who do not pay taxes.  One is an individual who usually earns about $40,000 a year and has not filed taxes in over 25 years.  Another is an individual whose income I don't know, but who hates our government so much that he just doesn't pay.  (But is quite vocal about what is right and wrong about our country and government and will probably even vote this year.)  And the third is one whose income probably hasn't been more than $25,000 a year for the past 5 years when he has not filed.  I'm sure there are others like these all over the country.  Perhaps if the IRS would go after these individuals and others like them we would not have to try to overtax families making $250,000.