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Wednesday, September 15, 2010

Mad About Taxes

The media and the public are divided and angry.

Some people, such as billionaire Warren Buffett, say that tax increases for the rich are “fair,” since the rich currently pay less tax than the poor. For others, any increase in taxes for the wealthy is an example of socialist government, and a disincentive for hard work.

The expiration of the Bush tax cuts has been called “the wrong move at the wrong time.” This expiration, combined with Obama’s proposed tax increases for those earning more than $200,000 per year has been dubbed the “small business killer.” Should we be worried?

When I worked as a lender, a consistent thing I noticed about small business owners is that they claim to have almost no income. A man could own a successful business, drive a Mercedes and take annual vacations to France, yet according to his company's financial statements be making $20,000 a year. This was normal.

For lenders, the financial statements of small business owners can be frustrating. Owners typically often write off so much (to avoid taxes) that it becomes difficult to approve their loans.

“Just show a little more income next year,” lenders often tell business owners.
“But then I will have to pay income tax," the owners counter. "You know I make lots of money. Can’t you just approve it?”

The proposed tax changes would raise taxes for individuals earning $200,000 per year, or families earning $250,000 per year, with lower taxes for those earning less: this is hardly a small business killer. A small business owner that shows an income of $200,000 per year would, in all likelihood, be earning at least 3 times that much - and there are simply not many small businesses pulling in that level of income.

Then there is the debate about lowering taxes for the middle class. Many members of the middle class themselves are opposed. Personally, I find this hilarious. One of my favorite things about the GOP is that they have actually convinced people earning less than $200K a year that tax cuts for the rich are good for the economy, but tax cuts for themselves are unnecessary. I love it! Gullibility knows no limits.

From an economic standpoint, lowering taxes for the nation’s middle class makes sense. The middle class tends to live “paycheck to paycheck,” spending almost everything they earn. Any decrease in taxes (increase in money to spend) would go directly into the local economy. High-income earners, on the other hand, tend to save more, or spend their money overseas. In terms of boosting the economy, a tax decrease for low- and medium-income earners gives far more bang for the buck.

Being that the US has a record deficit, somebody’s taxes need to increase. Increasing taxes for corporations is a bad idea, since unemployment is still far too high and corporations are the nations largest employers. Tax increases for the middle class is also a bad idea, since their spending levels (which constitute most of the US economy) are already low. The wealthy are the best choice for tax increases, because their personal spending levels will be least affected.

Tax cuts for the rich after the economy is rolling smoothly again – sure, why not? Everyone believes in the American dream. Everyone believes that someday, they too will earn more than $200,000 per year. And, they want to make sure tax levels are low when they get there.

“In 1790, the nation which had fought a revolution against taxation without representation discovered that some of its citizens weren't much happier about taxation with representation.”

President Lyndon B Johnson