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The short sound bites of political debates and campaign appearances make it difficult to create public understanding of complex issues. Indeed, they make it easy to distort the facts. Which brings us to all the talk about "Joe the Plumber" and Barack Obama's tax plan.
I, too, own a small business. It does between $2.5 million and $3 million in gross revenue per year. The business is organized as what's called a "subchapter S," which means any profits that the business generates flow through to my family's personal income. So our personal income is the total of what we pay ourselves for running the business, plus any net profits the business generates.
Wages paid to employees plus any payroll taxes paid on employee wages (that's Social Security plus Medicare plus a few other small taxes like unemployment taxes and workers' compensation) are part of what is taken out of gross profit to generate net profit.
I don't fault people for their ignorance about complex tax matters -- why should they be expected to know the arcane details of business taxes -- but I do fault those taking advantage of that ignorance to confuse the issue for political gain.
Here's the bottom line: For my small business, which employs 16 people, we don't generate more than $250,000 in net profit. Therefore, we wouldn't be adversely affected by Obama's tax proposals. If we saw that we were about to be affected, we'd work to minimize our tax exposure. We might do that by squirreling away up to $40,000 per year in a 401(k). We might do it (and have done this in the past) by giving end-of-year bonuses to our employees, without whom we could not have the success we do. We might do it by reinvesting in our business. There are always investments that small businesses need to make, and those count toward reducing their tax exposure.
In fact, Obama has proposed that, for each additional employee I take on, I would get a $3,500 tax credit. A credit differs from a write-off. A credit reduces my tax bill directly. A write-off just reduces my net profit. So if I'm in the 35 percent tax bracket, a $3,500 credit is equivalent to about a $10,000 write-off. Not a bad deal.
Someone like me is in that middle zone where I can never seem to escape payroll tax (not paid on income over about $102,000 now) nor do I have enough money lying around to invest in something other than my business. Someone who earns $500,000 pays the same in payroll tax that I do -- and, remember, payroll tax is 15 percent (7.5 percent for the wage earner plus 7.5 percent for the employer; in my case, I'm both). So if I earn $102,000 in wages, I pay $15,300 in payroll tax. If I earn $500,000 in wages, I pay the same $15,300 in payroll tax. This is a truly regressive tax.
Further, if I had a bunch of money to invest, I could earn a significant amount of my income from capital gains. Capital gains tax is 15 percent, and there is no payroll tax on capital gains. So if you are fortunate enough to be able to earn $500,000 in income from capital gains rather than wages, you pay $75,000 in taxes compared to the wage earner who pays $190,750 (35 percent income tax plus 15 percent payroll tax on the first $102,000).True patriots would quit complaining about paying their fair share. They would not place the burden on the poor and middle class today and our children and grandchildren tomorrow.
"Genius may have its limitations, but stupidity is not thus handicapped." - Elbert Hubbard (R-Iowa 1905-1912)
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