The Tax Burdens on Small Businesses
I am Joe the Plumber. It hit me, as I finished my tax return last week and wrote a check to Uncle Sam. Joe (really Sam Wurzelbacher ) was the guy candidate Obama patted on the shoulder and suggested that taxes should be increased on the rich. Joe surprised Obama, said he owned his own business and would pay more taxes under the Obama plan.
Mine is the proverbial small business, one of those companies known as a partnership, sub-S corporation, or LLC which combines the business income with the owner’s income on the same tax return.
When my company income is added to my salary, I look rich, even by my own standards. Not rich like Warren Buffett or Mitt Romney. To them, my income isn’t pocket change. But to me, the income on my tax return shocks me.
The problem is that small businesses don’t get to keep or spend the income on their tax returns. Most of it stays in the company to buy new buildings (we built a new one last year), to buy more inventory (did that, too) and to support growth (that, too).
Small businesses are mythically – fired employees start most new small businesses – the job creators. For 30 years, Republicans have had a singular tax mantra: lower taxes create jobs. Our company has grown from one to almost 30 employees. Yet we’ve never thought: “We need to hire a new employee, but our federal income tax is too high. So, we can’t afford it.”
Like many small businesses, my company’s profit doesn’t feel like a profit. Last year, our inventory went up by more than our profit. We had to spend our entire profit, plus more, to replace goods on the shelf for tomorrow’s customers. As a drug store, most of our customers have insurance so that they take their drugs today and we get paid next month.
When the ink dried on my tax return last week, we reported a nice profit. Which landed on my tax return. But, because of our growth, we had no cash. So, I had to borrow money to pay my income taxes. In fact, combining my company’s profits and my salary put me in the Democrat’s “rich” tax bracket. My tax rate is higher than Warren Buffet’s secretary, and more than double Buffet’s and Mitt Romney’s tax rate.
For decades, Republicans have argued that lower tax rates encourage job creators (like me) to hire more employees, and that really low, or zero, capital gain taxes encourage the rich to invest more, thus creating even more jobs. President Bush did that, but no jobs were created during his eight-year presidency. Oh, well. Maybe it will work this time.
President Reagan is looking pretty good to me right now. He installed a 28-percent maximum tax rate on all income, regardless of source, by lowering normal rates from 50 percent and increasing capital gain rates from 15 percent.
Operating businesses that generate jobs, like mine, don’t have capital gains. They pay the full freight. Almost half the income in the economy is from finance, earned by investors who pay lower tax rates. The idea is lower rates reward the risk they take. Of course, investors like the Buffets and Romneys can sell their stock and get out any time.
My house is the collateral for my company’s loans. That’s real risk and normal for small businesses. We have to hang in there or lose our homes. Would one candidate explain how small businesses have less risk and pay twice the tax rate as super rich investors?
Both parties agree that the tax system needs to be reformed and made more “fair” by “broadening the base” and lowering tax rates. That means paying a lower rate on more income. Over the past 50 years, history has shown that when rates are lowered and the amount taxed is increased, normal people pay almost same amount while the rich pay less.
Apparently, my problem is that I’m not rich enough to pay less. Maybe President Obama will drop by my store, rest his hand on my shoulder, as he did to Joe the Plumber, and assure me that I should pay less tax. Maybe Mitt Romney will invest in my company and help it grow into a company with 90,000 employees as he did for Staples. Then, I’d be really rich, he’d be richer, and both of us would pay lower tax rates.
And what about the real Joe the Plumber? He’s running for Congress.