If you make more than $250,000 a year ...

[Lesleymo]

According to some Republican guy on the teevee last night, people who make more than $250,000 a year are typically "small business owners." So we can't tax them, poor babies, because then they would cut back on hiring.

But, said the host of whatever show it was, we're talking about personal income, not business income.

No no said the Republican, these people own small businesses so the business income is reported on their personal tax return so it only LOOKS like they are personally earning that much.

Hm.

Correct me if I'm wrong, which is totally possible. But I'm thinking the only way you would report *all* of your business income as personal income is if you are a sole proprietor which by definition means you HAVE NO EMPLOYEES. If you have employees, that expense would already be accounted for (probably through some kind of corporate structure, large or small) before you tally up your own 6-figure income.

If your personal bottom line is $250,000 or more, congratulations. Stop whining. You can afford a tax increase.

[Champion Jack]

1. What percentage will their taxes go up?

[safeinOhio]

13. Back to the rates under Clinton.

Remember the late 90s when we balanced the budget and business was so good. Employment was high and the poor rich were paying 3% more than now in tax.

[Dappleganger]

25. and our deficit went away, too.

Although that's not likely to happen in this term, OR the next if the rates go up. We have to stop throwing unlimited amounts of money into the Black War Hole.

[hobbit709]

2. A good republican whine has never been deterred by facts.

I know quite a few small business owners. Their average net personal income is a lot closer to $25,000.

[Travis_0004]

3. A sole proprietor means there is only one owner

You can have as many or few employees as you want. Also, there are S Corporations, which do not file business tax returns. They are considered flow through entities, which means any income the business makes goes straight to one (or more) persons individual tax return.

[Xipe Totec]

4. Welfare for the wealthy nt

[pnwmom]

5. You can be a sole proprietor (owner) and have employees. Not everyone

chooses to run a business as a corporation. There are costs involved, for one thing.

OTOH, I don't oppose raising income taxes on high-earners to their Clintonian levels.

[ejpoeta]

6. if they are reporting all income earned from their business on their personal tax return

then wouldn't they also be including expenses on that same tax return? even if their company made $250k, their expenses would push that number down. i don't know much about this stuff, but it would seem that way. and also, i have seen that the wealthy seem to be quite good at finding ways to push those numbers down. giving to charities. stuff like that. i am not saying that a sole proprietor whose business earnings totaled the $250k would be doing that, but i'm sure he would probably have an accountant do his taxes and THEY would know how to do that.

[Th1onein]

7. I think that this statement is incorrect:

"...if you are a sole proprietor which by definition means you HAVE NO EMPLOYEES."

[justanaverageguy]

86. That statement is indeed incorrect

Sole Proprietor means that there is one owner and there is no fictitious legal entity involved such as a partnership, corporation, or LLC. Sole Proprietorships aren't that common because it's pretty stupid to run you business this way. There is no shield to protect you personal assets such has your house or retirement savings from liabilities incurred by the business.

[FBaggins]

8. It was Paul Ryan on the Chris Matthews show.

And yes, it's likely that the large majority of people with that much taxable income are small business owners.

We can debate whether they should pay higher taxes (it's still their income after all), but we can't pretend that they are something other than what they are.

[librechik]

72. Paul Ryan: Big. Lying. Conservative. Dickhead. n/t

[baldguy]

9. People who report their business income as personal income are tax cheats.

[Warren Stupidity]

11. That is how it works for partnerships, llcs, and self employed people

Your business income flows directly into your 1040 as personal income.

[ProdigalJunkMail]

12. completely and utterly wrong...

all the profits from my S-Corp that I ran for years flowed into my 1040. So, I got paid a salary from that corp...I paid my employees...I paid GOBS of taxes...and any profits left over became 'mine' in terms of taxes.

sP

[Statistical]

22. You might want to learn about the taxcode before making false statements.

Actually the reverse is true.
Anyone with a sole proprietorship, partnership, or S-corporation that DOESN'T report business income as personal income may be a tax cheat.

[Bonhomme Richard]

10. That is true for a S Corph

I found out the hard way. All my company profit is considered personal income and taxed that way.

[Stinky The Clown]

14. He was spinning like a whirling dervish.

It was Paul Ryan and it was on Matthews' show with Cynk Ungar playing the Matthews role.

[DailyGrind51]

15. Buy your kid a Ford for graduation instead of a Saab or Lexus!

[Iterate]

16. It's all about smoke and confusion.

A sole proprietor can have employees, because it only means, essentially, sole ownership and liability.

"Small business" is a vague term, but is usually defined as one having fewer than 50 employees or less than $1.5M in sales. Anyone who ran a business of that size and passed up a contract or refused to hire someone to do new work simply because their personal income taxes went up a few percent is an idiot and wouldn't likely be in business for long anyway.

The only time personal income would roughly equal business gross income (or call it net sales or total billing) would be for someone who had very low overhead -work from home, no employees, no inventory or material sales.

Then just do some quick math. Not all hours worked are billable: plenty of time is spent finding new clients, billing and books, continuing education, promotion, on and on. Anyone who can average a nearly full week billed is a rare bird and to make $250k must be billing at a rate of $125 to $200 an hour. Not your average plumber.

Now the truth of the matter, for self-employed sole-proprietors, from the IRS in 2007:
# of sole proprietors: 23,100,000+
Average Gross Income (Business Receipts): $57,143
Average Business Deductions: $45,022
Average Net Income (pre-tax profit or loss):$12,164
Net Income for Profitable Businesses Only:$14,502

[LaurenG]

17. If I made more than 250K a year I would have to have a well running business

and I am not really sure if it could be considered small if I were paying myself that type of salary, but then that's just me.

[FBaggins]

19. It isn't "salary" - it's the profits of the business.

And no... you wouldn't have to have a remarkably successful business to have it make that much (and would certainly be "small" by any measure).

[LaurenG]

28. Thanks, I misunderstood the whole premise

250K isn't much to report as profit.

[Hosnon]

35. But salaries are considered business expenses.

So if a business nets $250,000, you can bet the owners are getting paid quite well already. If not, they'd simply up their salaries (i.e., how large of a business expense they are).

Note: I'm probably thinking only of corporations - not too clear on how it works with sole proprietorships, LLCs, etc.

[Vickers]

18. What they fail to realize is that "small business owners" who are making $250K and

up includes a lot of lawyers, doctors, etc. who don't seem to be doing too bad down here (Florida) judging by their automobiles.

[FBaggins]

20. And fast food franchises... and dry cleaners...

...and gift shops and "mom&pop" restaurants and book stores

and and and.

[Statistical]

21. sole proprietor doesn't mean what you think it means.

Someone can be a sole proprietor and have 10,000 employees.
Someone can be the only employee in a corporation.

Number of employees has nothing to do with business structure.

Business structures in the United States:
Sole proprietor
Partnership
Limited Liability Company
S Corporation
Corporation

Any of those can have no employees beyond the owner, a few employees, or thousands of employees.

"If you have employees, that expense would already be accounted for (probably through some kind of corporate structure, large or small) before you tally up your own 6-figure income. "
Not necessarily. Only roughly 1/3 of business are corporations.

I agree the tax rate needs to go up but don't be in denial and pretend it won't affect small business. The reality is we are simply broke. It will have a negative effect on small business owners but the increase isn't that large (about 3%) and we really have no other choice.

Still don't be misinformed and think all small businesses with employees are corporations. For a variety of reasons the overhead of corporation doesn't always make sense.

[Hosnon]

37. Why wouldn't all business expenses be accounted for before taxes are assessed?

Were I a sole proprietorship, I sure as spit wouldn't want to tax the remaining pot of money before my employees' salaries were accounted for.

It seems to me that, regardless of the business structure, the owner of a small business will generally get what is "left over". And what is "left over" is usually what is left over after all business expenses are paid. And $250,000 isn't chump change.

Am I missing something?

[truckin]

40. You are correct. NT

[Statistical]

41. I never said $250,000 was chump change.

Of course all expenses are accounted for.
Businesses are taxed on profit and sole proprietorship are no different.

Thus say a business has $10 million in revenue (sales). It has $9.5 million in exepnses (including wages of all employees). The business clears $500,000. This is the "income" on sole proprietors tax returns. This doesn't mean he will have $500,000 in profit into his bank account, likely some will be saved for future business expansion, working capital, etc. It is still all taxed though.

Profit (income) = Revenue - Expenses.

Taxes have to be increased and they are most easily borne by the wealthy. I am not saying the tax cuts shouldn't be allowed to expire.

I was just correcting your inaccuracies. Sole proprietorship (like partnership, corporations, LLC, etc) is a method of ownership. It has nothing to do with employees.

[Hosnon]

46. I think you have me confused with the OP.

I was asking for clarification on your "not necessarily" remark about employee salaries being accounted for before profit is determined. In any event, I think we're in agreement: increasing taxes on any business that is doing well enough for the owner to make $250,000 is not the end of the world.

[Statistical]

47. Ah yeah I did confuse you for the OP.

The only thing to watch out for will be law of unintended consequences.

Asshole boss sees his post-tax income fall 3% institutes a 3% reduction in wages (thus boosts profits, thus his post-tax income is equal or higher despite higher taxes). Employees pay he cost of his increased taxes.

With the labor market as weak as it is what are employees going to do quit? To 10% unemployment? To potentially an even lower paying job?

[justanaverageguy]

87. Why is the boss an asshole?

If what I get to put in my pocket is going decrease next year because my tax rate is going to go up, then I'm going to make adjustments to get my "pocket amount" back where it once was. Of course there are various ways to do this. Such as raising prices, making changes to run more efficiently, or freezing or reducing my labor cost (which would make me an asshole I guess).

I make no bones about it. I'm in business to make money. I'm certainly not to the $250k per year level....yet. But my business is growing and I should be in a year or so.

Raise my taxes by 3%? Fine, but don't pretend there won't be consequences.

[dmallind]

23. Nol only that

but one way to get your personal income from your business back down below the tax increase threshold would be to increase expenses, including hiring, which is of course 100% deductible.

[Statistical]

24. Or another way to get your post-tax income back up to the same level

is to cut your employees pay.

Most people don't really care about how much taxes they pay, they care about how much post-tax income they have. Taxes go up 3%, cut wages 6% and the owner is actually making more money despite the tax hike.

[ieoeja]

57. I suspect that is why the economy always does so much better under Democratic Presidents.

Reinvest (thus creating jobs) during times of higher taxes.

Cash out (thus destroying jobs) during times of lower taxes.

[uncommon]

26. Sole proprietors can have employees, they just don't have any co-owners

in the business.

[slackmaster]

27. The $250,000 figure is being used as a smoke screen

The tax cuts that are due to expire at the end of the year apply to all income levels.

Congress must act in order to keep taxes on the MIDDLE CLASS from going up while we are still in a deep recession.

[truckin]

29. This is a false argument. If a small business owner can make

more pre-tax income by hiring more employees, a smart owner will hire more employees regardless of the tax rate. It's as simple as that.

[cbdo2007]

30. That's true - small business owners more than any others are going to want to always do

whats best for the business because it's all about what makes them the most money. In small business - that still rings true, unlike these big corporations where the CEO gets Million$$$ even if the company tanks.

[KharmaTrain]

31. The Definition Of Rich...

When I started out in the job world waaay to many years ago, $20gs was a nice salary, 50gs was big money. Today 20gs is poverty level and 50gs is about enough for most families to get by. The definition of being rich depends on your place on the income ladder...and we see it at work here on DU. Those with little or no money look at the rich differently than those who make $50gs or $100...and I've met millionaires who feel they aren't rich compared to those who have 10 million. It's all perspective.

The small business strawman is the same game where you have many who believe its the rich who produce jobs as opposed to those who see labor as the producers of the wealth.

The bottom line is we're a selfish country...wanting everything and not wanting to pay for it. We're used to the government finding ways to come up with the money and then there's still the cry that we're paying too much in taxes. It's been a disaster as this country is now bankrupt and this attitude will hamper any recovery.

[MAcciard]

32. you are wrong... sorry

a sole proprietor, means that you are the sole owner, not that you are the sole employee. I am a sole proprietor, and at my business' peak I had 6 employees. Now I have myself, my kids, occasionally, and the odd temp.

And yes, most small business owners, all that are sole proprietors, or partnerships, rather than corps. or llc's, report ALL of their revenue on their 1040's

[truckin]

33. You report all of your income, not revenue. NT

[Statistical]

44. Technically you report both.

IRS wants to see revenue, expenses, and income (and income better match revenue - expenses).

[truckin]

45. Agreed, but you only pay taxes on income. NT

[MAcciard]

50. True to a point...

the difference is that usually you actually pocket less than you are allowed to declare for taxes. And you also pay self employment taxes on top of any income tax liability. And self employment taxes can be owed even if your business registered a loss.

[MAcciard]

51. Ok, here is an example using a really greedy, evil HUMUNGOUS Corp.

as an analogy.

Lets say that Exxon was a small business, just for the sake of argument, but their profit MARGINS remained the same as they are now.... and I DO know that this is a stretch but I am trying to illustrate a point, so please bear with me....

According to their filings, in 2008, the last year for which I could find full numbers, Exxon had $45.2 Billion profit, on $477Billion in revenue. This means that they actually kept only 9% of what they earned. Oh and they paid taxes of $116.2Billion, or 2.6 TIMES what they made! They paid $36.5Billion in income tax, $34.5Billion in sales tax, and $45.2Billion in other taxes.

My point is that especially for the small business owner, the amount you bring home to your family is vastly different from the amount your business takes in, and often the amount you pay in tax is exorbitant in relation to what you did bring home.

[Hosnon]

34. Any small business owner who is paying himself/herself $250,000 per year is not struggling.

Small businesses are much smaller than I think most Republicans realize (i.e., I'd consider any business that can pay its owner over $250,000 at least mid-sized).

And if I'm not mistaken, few businesses would have over $250,000 in income after paying its owner a $250,000 salary. In reality, the business owner would be paid $500,000.

[Statistical]

42. $250,000 in business income does not mean the owner paid himself $250,000.

An owner that does that won't be an owner for very long.

Business need working capital, capital for expansion, capital to pay down debt, capital to survive drops in demand.

A business that clears $250,000 the owner might get a fraction of that. How much really depends on how big/old/mature the business is.

The owner of a startup that clears $250,000 might only compensate himself $50,000 in order to put the other $200,000 back into the business (grow the business). The owner of a very established, non-growing business might take 90% of that as personal compensation.

Equating business profit with how much the owner pays himself is a fallacy.

[Hosnon]

48. Most small businesses that I encounter aren't concerned about expansion, etc.

They're concerned about keeping the doors open. (I say that as a small business owner myself and the son of two people who each own small businesses.)

If a small business reports any profit, that means that the business owner is adequately compensated.

Note: My previous post should have referred to "profit", not "income". I tried to edit but the time has expired.

[truckin]

49. You make good points about how much an owner receives but

it still doesn't change the fact that if an owner can make more pre-tax income by hiring more employees he or she will, regardless of the tax rate. The argument about not raising taxes on small businesses making over $250K because it will hurt job growth is false.

[FBaggins]

58. There is no "regardless of tax rate" calculus.

The key to understand here is that we're talking about the margins. Tax policy does impact behavior. To pretend otherwise is silly.

It may be the right thing to do, but we can't pretend that it doesn't have an impact.

[truckin]

67. You're missing my point. If you have a landscaping business

and you get so much new business the only way you can meet the demand is by hiring more employees, you will hire more employees, regardless of the tax rate.

[FBaggins]

69. That's an artificial scenario

that presumes you have an unlimited supply of potential new business. That simply isn't the real world for all small businesses.

What if you have just enough new business that you have one more job than you can handle with your current crew? You wouldn't hire a new employee to mow one more lawn (also regardless of tax rate).

Some businesses will hire even with higher taxes because they have to... and some won't hire anyone (or will even lay some off) even if you cut their taxes to zero. The point made here is that the marginal decisions (the companies that are close to hiring/firing that next employee) are impacted by tax rates.

[truckin]

70. It's not an artificial scenario and there is no presumption of an

unlimited supply of potential business. Some small businesses did expand during the bad economy and their decision to hire new employees was based on their bottom line, not tax rates.

In my example, a landscaping company would probably stretch their current workers, and maybe even use temps, until they secured enough new business to justify hiring a new employee. They would hire when the additional revenue they bring in is more than they would pay the new employee.

This does not presume an unlimited supply of potential business. If landscaping Company A offers better service and pricing than Company B, Company A will take some of their customers and grow. Company A's decision to hire additional employees is based on thier business needs, not tax rates. It's as simple as that.

[FBaggins]

71. Of course it is.

The fact that you can come up with an example of a business that would hire regardless of taxes is not evidence that all businesses would do so.

The simple fact is that tax policy does affect behavior (and the larger economy). It's beyond contesting. When companies pay more in taxes, they try to compensate by charging more or by cutting expenses (which includes salaries and/or positions). "They'll just live with less profit and pay the tax without changing anything else" is remarkably naive.

If we speculate about a $5,000 credit for hiring a new employee, there are some companies that will get that credit for hiring they were going to do anyway... and there are some companies that won't hire someone because they don't have the need and $5k isn't enough to make it worth their while... but there are some companies that wouldn't have hired at this point who change their mind because the credit changes the situation to one that makes sense for them. Your argument is like looking only at the companies in the second category and pretending that they are a reasonable proxy for all companies.

[truckin]

73. Please provide an example where a company would not hire an

additional employee if that hiring would increase the company's pre-tax profits. Conversely, provide an example where a company would hire an additional employee when that hiring does not increase their pre-tax profits but when tax rates are lower.

Of course my example does not cover all scenarios, so please give a real world example of how tax rates effect a company's hiring practices.

[FBaggins]

74. Lol !

"Please provide an example that presupposes that my position is correct"

Are you serious?

Real world examples are all around you. For the last few years there have been tens of thousands of companies that have seen their after tax income (the only thing that matters to the owners) decline. What have the results been? Job cuts - benefit cuts - salary reductions - or more work without additional pay. It doesn't matter whether the after-tax hit was due to lower sales, lower margins, or higher taxes... that's just econ 101.


Look... it's ok to say that it's the right thing to do. It may very well be. But pretending that the rich guy at the top is the only one who will pay the tax and it won't impact how he rund his business is naive in the extreme.

[truckin]

75. I asked you to provide an example to back up your point and it

appears you can't. If you have any real world examples to back up your contention, I'd love to continue this debate. If not I guess we're done.

[FBaggins]

77. You appear to operate under the delusion that you GAVE an example.

You invented a fictitious company, I pointed you to thousands upon thousands of real companies.

Ok... take your imaginary lawn care company. Half of his customers have dropped his service as their own personal budgets have declined and they decide to mow/treat their own lawns. He's gone from a million dollars a year in after-tax profits to $300k. He just decided to lay off 30% of his workforce and reduce benefits on the remaining 70% (making several of them part-time). His revised plan for the year boosts his profits to $650k. Now you come along and raise his taxes by $50k. By some feat of imagination, you think that although he was willing to lay off a number of people when he lost money in a downturn, he won't change his practices if the loss comes because of taxation.

Tell me... do you think it's the same thing for gas prices? That businesses never change their policies when gas prices double? After all... they need to drive however far they need to drive, right? The owner would never, say, cut his service from six visits to four per year (for fertilizer/weed/lime/etc) and combine multiple treatments just to save money on fuel usage (laying off excess staff in the process), right? He'll just suck it up and pay the extra cash.


I just love watching people who assume that most wealthy business owners got where they are by being stupid. Taxes and regulatory changes are often the right choice to make, but it's ridiculous to pretend that people don't change their behavior in response. If the "non-wealthy" tax cuts expire, I'm due to pay $3,000 (+/-) in additional federal taxes. If that's my fair share than so be it... but we will cut back in other places. Maybe not $3,000 worth, but it will have an effect. There are services that I'll no longer purchase... or restraunts that won't be getting my money (or servers my tips). The impact is far more than just $3k extra to the government.

[truckin]

78. Do you own a small business? Have you ever paid an employee?

Just curious.

[FBaggins]

79. Plenty of them

(in the 2nd category). Obviously you haven't. What I have also done is reviewed financial for hundreds upon hundreds of businesses. Each time, it was important to understand how their business operates.

Were you going to try to respond or just continue to play games?

The point is simple. You want to pretend that tax policy impacts nothing but the amount of money that comes in. That people will just pay it and suck it up and will never change their behavior in response.

You're wrong.

[truckin]

81. You've paid employees but you never owned a business? Is that

right?

[FBaggins]

83. Did you read the update?

Even if I had (and I haven't unless you count a paper route decades ago), wouldn't that be ONE business (or three)? How would that be more relevant than your imaginary example?

I've reviewed the financials (including spreading profit/loss plans and pro-forma plans) for hundreds upon hundreds of companies for going on three decades.

Including business plans that involve changing tax environments.

[truckin]

80. You make the following statement and this is where we may not be

connecting.

Now you come along and raise his taxes by $50k

You don't raise a companies, or individuals, taxes by a set amount. Taxes are calculated as a percentage of income. I assume you know this but It's not clear. A company tries to maximize pre-tax income. If a company can create $70K in extra income by hiring an employee and paying that employee $50K, including benefits, they will do it and net $20K in extra profit. Whether the tax rate they pay on that extra is 35% or 40% is not going to effect the decision to hire that worker.

[FBaggins]

82. It's obvious that we're "not connecting" - but it isn't for the reason you assume.

You don't raise a companies, or individuals, taxes by a set amount. Taxes are calculated as a percentage of income.

You're just being obstinate. When the owner makes his plan for the coming year, he takes that into account and knows how much his after-tax income is going to go down as a result. You don't send him a bill for "$50k more please" - but you give him the information to know that's how much it's going to cost him.

company tries to maximize pre-tax income.

Dead wrong. A company tries to maximize after-tax income. This is the key to your error. What do you think would happen to the stock price of XYZ Co. if their pre-tax profits doubled but their after-tax profits declined by 10%? You think they would be happy?

Whether the tax rate they pay on that extra is 35% or 40% is not going to effect the decision to hire that worker

You assume a perfect world where every single new dollar of revenue costs exactly the same amount and the business is operating at 100% efficiency. As if every new customer/order involves changing staffing because everyone was already working at full capacity. As if businesses have no option of cutting costs because everyone is already cut to the bone. As if it's impossible to expand without increasing staffing.

That isn't the real world... and the last few years should have proved that to you.

[truckin]

85. It sounds like your experience is working for a larger company.

I owned a small business for 13 years and I recently sold 75% of it to a large company. My goal, and the goal of the large company that I now work for, is to maximize pre-tax profits. Are there things we can do improve our tax situation? Yes, we can accelerate depreciation on equipment and some other things but they really do not affect our hiring practices. It doesn't matter if we are hit with a 35% or 40% tax rate on our profits. It does not change our hiring practices.

Anyway, no hard feelings, I don't think we'll come to an agreement on this and I'm done.

[FBaggins]

88. Very well. But now it sounds as if...

... you do target after-tax income... you just can't think of more than one or two ways to do that (and can't imagine any that affect staffing).

No big deal (and certainly no hard feelings)... it just means that you know more about plumbing (or whatever the business is) than you know about running a plumbing company. That's not uncommon and, now that I think about it, is often why the "large company" buys someone like you out. They like the client base/market/product/whatever, and see that they can run the company better than you can.

You act as if adding employees just involves an incremental increase in salaries and is offset by an incremental increase in sales (or visa versa)... so it's an easy decision to make. In reality, staffing increases are almost always related to more comprehensive expansion plans. The two new lawn care guys means that you need a new truck, trailer, mowers, garage space, etc. (plus there are hiring and training expenses to consider). That means an expenditure of capital - which only comes from a couple places (unless you get new investments): After tax profits or borrowing. Fewer profits (whether due to taxation or anything else) means that you're less likely to expand and less likely to hire. Borrowing requires convincing the bank that you can pay them back... and I assure you that all THEY care about is your after-tax profits.

There are load of other examples. What if you have 49 employees and the new tax code means that hiring two more puts you over the threshold for loads of new expenses? You think that tax doesn't impact your hiring decision? What if you have 51 and firing two of them will save you more money than all of the business they bring in?

Say you have $50,000 knocking around and nowhere to use it for the next year. You find an option of putting it into a one-year company bond at 3% or a local municipal bond a 2.75%. One will pay you more before taxes and the other pays more after taxes. You really going to tell me that your goal is to maximize the PRE-tax return?

[truckin]

89. All right, you dragged me back in.

My company is not a plumbing company, not that's theres anything worng with that, and the large company that bought 75% made me stay on for three years to run the company as a condition for the sale.

Your point about 49 - 51 employees is valid, but if the company expands even more, that becomes a non-issue.

Of course I realize that if the Landscaping company in my example loses business, they will most likely cut employees. The point is that the business environment for the company, not the tax rate, influences that decision.

Let's say the owner of the Landscaping company is married and pays himself a salary of $100K. Then lets say his company shows a profit of $200K so his total income is $300K. This puts $90,750 of his income in the 33% bracket. This portion of his income will generate $29,948 in taxes (90,750 X 33%).

Now let's say this rate goes to 36%, which I believe is the rate before the Bush tax cuts. And let's say that all $90,750 is subject to this new higher rate, even though Obama says only income over $250,000 for married couples will be taxed at a higher rate. We will trust Obama enough to assume that the first $209,250 for a married couple will be taxed at the same rate.

BTW, this example holds true if the company is set up as an S Corp or, I believe, a Sole Proprietor.

BTW, this example holds true if the small company is set up as an S Corp and I believe a Sole Proprietor.

So $90,750 X 36% is $32,670. The owner of this company, who pays himself $100,000 and takes out some portion of the $200,000 profit his company made, will pay an additional $2,722 in taxes ($32,670 - $29,948).

This is not going to be a deciding factor in whether that owner hire more employees or cuts his staff. What he anticipates his future business to be, will.

This example may not hold true for larger companies, but this discussion is about small companies. Small companies can be much bigger than this but this gives you an idea of how the numbers work for many small companies.

[FBaggins]

91. Ok. I'll drag some more.

:)

The point is that the business environment for the company, not the tax rate, influences that decision.

and my point is that the tax rate is part of the business environment. You could look at business textbooks or international rankings of business environments... the tax rate is most certainly a factor.

As for the rest? Of course a $2-3k addition to a tax bill isn't going to make much of a difference in his business decisions. But if the company is making 300k or 500k he's still a small business and the hit gets much larger (and the top rate was 39.6% starting just above that 250k). You're quickly talking about salaries then. Again, you can't make up the most advantageous example and assume that it fits all scenarios. There are of course SOME companies that fit your earlier model where the rate won't make much difference, but plenty where it would.

Your point about 49 - 51 employees is valid, but if the company expands even more, that becomes a non-issue.

I appreciate that, but there are plenty of other thresholds. Doesn't much matter since the specific example here is a rate. The better point, however, dealt simply with the basic principle. Businesses live and die with capital positions... it impacts everything they do. You must certainly know of companies that could expand and could hire more people and could make more profits... IF they could just get the capital to do so, right? More taxes = less capital. Surely you can't disagree?

And no... there's not a thing wrong with plumbers (or landscapers for that matter). :-)

[MAcciard]

53. Thank you

This is what I have been trying although less eloquently to explain.

[unblock]

36. the "small business owner" canard is at best an argument for a tax break for SMALL BUSINESS OWNERS

not for anyone how makes more than $250,000.

in fact, if reason why small businesses are so wonderful is because they HIRE people, than at best this is an argument for a tax break for HIRING more people, not for everyone who makes over $250,000 and not for every small business owner.

[Romulox]

38. This is the flip side of the Rahm canard that Dems want to "extend the taxcuts"

for "middle class" people making $250,000 or less. People making $250k/year are in the top 5% of earners or so. NOT "middle class".

[Statistical]

43. Well technically it is $250K married. $250K married isn't in top 5% of earners. Maybe top 10%.

[FBaggins]

52. No... $250k puts you in the top 5%

Last figures I saw were for 2007, but the AGI for the 5% line was $160k.

[lumberjack_jeff]

39. Ridiculous

Business owners (small or otherwise) don't hire more people than the business needs to profitably operate.

[Motown_Johnny]

54. That is pure B.S.

no way anyone is claiming business income as personal income



not with those numbers.



a lawyer or accountant would get them to incorperate

[FBaggins]

56. Sorry... that's simply wrong.

It happens all the time (including for the current President of the US).

And S-Corporations file this way... so the lawyer/accountant advice doesn't need to change anything.

We can fairly debate whether these businesses should pay more taxes (and/or whether now is a good time to be increasing taxes on anyone) - but we can't deny the fact that the majority (don't know if it's really 75%) of tax returns with incomes over $250k are small business profits.

[Motown_Johnny]

60. any way to support that "fact"

any link at all?



I don't buy it. I know people who own their own businesses and they all are incorporated and they all have holding companies.

None of them are bringing home 200K a year either.



also, what do you mean that includes the current President of the U.S.? Do you think he is a small business owner or is that just really phrased poorly?

[FBaggins]

64. Which?

The president's tax returns show hundreds of thousands of dollars (millions more recently) in small business income.

http://www.whitehouse.gov/sites/default/files/president-obama-2010-complete-return.pdf

I don't buy it. I know people who own their own businesses and they all are incorporated

And if they have an S-corporation (as most do), their profits roll to their personal income tax filing.

None of them are bringing home 200K a year either.

There's a difference between the profits of the company and the income an individual "brings home" - but in the case of a sole proprietor or S-corp, both end up on the 1040.

[Motown_Johnny]

84. this one

but we can't deny the fact that the majority (don't know if it's really 75%) of tax returns with incomes over $250k are small business profits



as you noted, the President isn't a small business owner but claims income due to speaking fees



your definition of what a small business owner is seems to be the source of the problem

[Motown_Johnny]

63. here is a link to Politifact.org which seems to agree with me

at least on the important issues.


It does depend on exactly how you define what a small business owner is but here is one interesting paragraph (emphasis is mine).


http://www.politifact.com/truth-o-meter/statements/2010/jul/27/stephen-hayes/so-called-wealthy-are-actually-small-business-owne/

^snip^


There's one final point we want to clarify here for our readers, because we've been asked about this before: If you are a small business owner yourself, you would have to be a whiz running a very profitable small business to get hit with a tax increase under the plan Obama supports. You would have to report total income of more than $200,000 (or $250,000 for couples) after all your business expenses were deducted. You may remember this being a key point during the Joe the Plumber debate during the 2008 campaign when Samuel Joseph Wurzelbacher said to then candidate Obama, "I'm getting ready to buy a company that makes 250 to 280 thousand dollars a year. Your new tax plan's going to tax me more, isn't it?" Back then, the Tax Policy Center analyzed all taxpayers, of any income level, who report these types of business income. They found only about 2 percent of them would see tax increases if the government increased the rates on the top earners. So the vast majority of possible small business owners would not see a tax increase if the Bush tax cuts expire for those in the top incomes.

[FBaggins]

65. No... you've confused to similar figures

Most small business owners may earn less than $250,000 - but most income tax returns that are OVER that amount are small business owners.

So it isn't that the proposed increase would hit all small businesses... but that the people who DID see the big tax increases would be predominantly from that category.

Though 2% seems way too low. I rather doubt that they got that right.

[Motown_Johnny]

76. Well, one of us is confused (perhaps both)

I think the problem here still lies is the definition of a "small business owner".


As I understand it, if a bank president receives a fee for speaking at the local chamber of commerce he/she can claim him or herself to be a small business owner because of that income. That is why most people who file returns for over 200 or 250 K fall into that category. Not because they own a restaurant or a dry cleaners.

I do not consider that bank president a small business owner and do not support giving him or her a tax credit based on ownership of a small business.



As for that 2% number. The claim has always been that these taxes are on the top 2%. It is reasonable to me to assume that number is correct.


As I researched this I found nothing to support what you claim was a "fact" in your previous post. Please post something more substantial than what seems low to you and your doubts that people who have looked into it did not get it right.

[GSLevel9]

55. a friend of mine

owns and runs a little sole proprieter business. He has a warehouse/office and a delivery truck, etc...

His income is $30K+ per month but after paying the lease for the office/warehouse, the cost of goods, truck lease, fuel, etc... he ends up making about $6-7K per month and that's what he pays taxes on.

[Greyskye]

59. We're small business owners.

And no matter which metric you use as argued above, our numbers fall far short of $250,000/year.

The Republican argument is specious as far as we're concerned.

[Orangepeel]

61. If it reported on their personal income tax return, then they ARE earning that much

:shrug:

If they put it back into their business by, say, hiring someone or buying more equipment, it wouldn't be on their personal income tax return. If they'd rather take the profit they've earned out to buy more personal things, that's great for them. They've earned it. But then it becomes personal income.

[Cleita]

62. Some small business owners take a salary, which takes

deductions just like their employees get and are included on the quarterly tax returns. They must file income taxes at the end of the year. Others take quarterly profits, which they have to pay estimated taxes on and file personal taxes at the end of the year. In the meantime they can take a draw on projected profits. If it is a corporation, the business owner is required to take a salary and legally shouldn't take a draw against the profits although he may make additional profit at the end of the quarter. Many small business owners, who incorporate to protect themselves against personal bankruptcy, don't seem to get that concept. Anybody making an income, whichever way it happens or just from interest and dividends that is over $250,000 a year shouldn't have anything to bitch about. I believe they should pay half of any amount over $250,000 in taxes with no loopholes.

[Initech]

66. Do they have *ANY* idea how the economy works? Any at all?

[Overseas]

68. That's only 2% of small business owners.

http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=389x8827618

[4lbs]

90. Let's say I'm a small business with 6 employees and I pay them a decent wage.

Let's say my employees each earn about $15 per hour. Based on a 2000 hour annual full-time work load (50 weeks at 40 hours per week), that's $30,000 per year each employee.

Multiply by 6 that's $180,000 per year. Thus, for me to earn $250,000 in NET income, I would likely have to earn about $400,000 in gross salary. That means my small business would have to take in at least $580,000.

Add in expenses such as rent/lease of property, utilities like water, electricity, gas, employee benefits, and operational equipment expenses, that could be as much as another $70,000 per year.

So, my small business with 6 employees would have to take in over $650,000 per year just to get enough money to pay myself $400K and my employees $30K each.

Now, let's take a look at the tax structure side of the equation especially the "Bush tax cuts". What will be my income tax pay before and after?

My net income is $250,000. The "Bush tax cuts" apply to the marginal tax rate for the amount above $200,000 for an individual or $250,000 for a family.

For me, that's the last $50,000 of my $250,000. That's all I need to concern myself with, since the first $200,000 will be taxed at a rate that is unchanged before and after the Bush tax cuts.

Currently that marginal tax rate is at 25%. When the "Bush tax cuts" expire, that marginal rate will go to 28%. Thus a difference of 3%.

What's 3% of $50,000? $1,500.

Yeah, that's how much more I would be paying in taxes when the Bush tax cuts expire, if I made $400,00 in gross income, and $250,000 in net income.

Wow. If I made $250,000 in net income, would I actually spend that extra $1,500 if the tax cuts were extended? No. It would just go into my bank account, accumulating interest and not stimulating the economy at all.

It would be better off if that $1,500 went to a social program and say, 3 people each got $500 in unemployment. Then you can guarantee that the $1,500 would be spent to purchase food and clothes, stimulating the U.S. economy, and with the multiplier effect, could actually have pretty much a double impact ($3,000) on the economy.