Ive seen a lot of commentary on letting the Bush tax cuts expire on people making over 250K. The standard line on Kos says that it doesn't impact small businesses and those that are saying that are simply lying and evil. I have seen calls for increases on capital gains taxes saying the rich are not paying their fair share on capital gains taxes. I thought I would post to clarify a few areas. You can read my other posts to see while I'm a conservative, Im certainly not an evil conservative (at least I don't think so). Im also not saying we shouldn't increase taxes on those making over 250K, I just want to clarify some of the talking points.
Kos community talking points that I have seen:
1) The tax increases on those making over 250K would not impact small businesses.
First, I'll preface this by saying that of the over 1M people who make over $250K/year I have no idea how many are small businesses. However I have seen some liberal articles do some very flawed analysis such as 98% of business owners make under 250K, therefore most business owners wont be impacted. Or the average income for business owners is 36K, therefore the average business owner will not pay more in taxes. Neither of these facts addresses what percent of people making over 1M are small businesses owners indicating who will be impacted. This would be important to know. Also, most small businesses making small amounts don't employ anyone. If you are making 250K in profit that means your revenue is probably in the 2.5M range which means you almost certainly have to be employing people.
Second, most small businesses are subchapter S corporations. This means the business income flows directly to your personal tax return. If I make 500K in the business and pay myself 35K, I report 535K on my tax return. Therefore as taxes for those making 250K go up small businesses will pay more in taxes. You may think of it as a 10-15K increase which is no big deal, but I think of it as already paying 180-200K in taxes which is going up to 200-220K. The amount already hurts and every increase makes it hurt more. Cash flow is often times what constrains most small business growth. There is almost infinite business out there if I only had the cash flow to spend to get it. While small businesses create value (for every dollar I spend I create 1.10 in value) the government does not (although obviously government services are important).
2) Inheritance taxes need to go up with no exemptions
This impacts small businesses because when I die, the stock in the company is passed to my children. This stock is treated like any other asset. If The stock is worth 5M and my children have to pay 40% 30% or even 10% in taxes on it, they will have to come up with the cash or sell all or part of the business. This issue has caused the breakup of many family based businesses.
3)The recession didnt impact people making over 250K
I know a lot of business owners that used to make 250K that simply went out of business and lost everything. I know a lot of business owners (myself included) that barely squeaked by last year. I can tell you that I (my businesses) made around 400K in 2008 and due to an accounting error, owed 75K of additional taxes in 2009 right when we were starting to lose a lot of money. In 2009 I (my business) lost 250K. Keep in mind that making 400K is really only making around 280K because of taxes. At the end of 2009 I will get some of that money back because I can carry those losses backwards, but it doesnt help the one extra person I had to lay off because of the cash flow impact of paying those taxes.
4) capital gains should be raised, it isnt fair that people that don't even have to work only pay 15% while we pay much higher rates
You may have heard of double taxation but may not understand what it is. You may still decide that capital isnt being taxed enough, but at least understand how much it is really being taxed.
When a company makes money it is called revenue. When a company spends money those are expenses. Profit is essentially the difference between revenue and expenses. Companies are taxed only on profit. This analysis is for C corporations which work differently than S corporations. Lets say the tax rate is 40% and a company makes 10M in revenue and has 9M in expenses. This leaves 1M in profit. The marginal rate is weird for corporations (goes up then goes back down) but the actual net tax rate on 1M is 34%. So the company pays 340K in taxes. Leaving 660K in actual profit. With this 660K, the company can distribute to shareholders or reinvest in the company. If the company decides to distribute to shareholders, the shareholders pay an additional 5% or 15% (usually 15%). The net amount shareholders get off the original 1M is 561K. So of the original 1M in profit, shareholders get 561K so they paid 44% in taxes.
With the 9M in revenue that went towards expenses, lets say an employee is paid 400K so their marginal tax rate is 35% and they actually pay 29% in taxes. Therefore the capital rate off the original revenue is much higher than the rate paid by the salaried employees.
Selling stock is trickier as stock values are often times based on future cash flow which companies obviously havent been taxed on yet. However long term the value of the stock should be related to retained earnings which are taxed at the corporate tax rate.
I want to emphasize Im not saying the tax rate should go up, down or stay the same. I just wanted to present some additional facts around what people are currently paying today and how small businesses could be impacted by increases in taxes.