During the debate, President Obama crowed that he did not raise taxes on 97% of small business owners. Mitt Romney explained to him, to the Presidents obvious discomfort, that the 3% who suffered the tax hike actually are responsible for 50% of all small business employees. Fact-checked, and true.
|Wave to Gus: his shop is on the second floor. He is very proud of his business, but hit the floor when the President said he needs to pay a mere 3% more in taxes to cover Obamacare. Which employee does he have to fire? Find out why he does.|
Because it takes very little for a small business to suffer: most cannot afford employees at all. And when Mitt Romney explained that the slightest adjustment in taxes can be disastrous for a small business owner, that was no exaggeration, either. Let us examine.
Remember that small businesses are required to use a different model than large businesses. A large business earns its revenue (that means money, by the way), pays its expenses (bills), and then gets taxed on the remainder. Whatever is left over is profit for the shareholders.
Small businesses do not generally enjoy such a model. For them, the IRS binds the owners finances to the businesss model. In other words, the business earns its revenue, gets taxed on that, and then pays the bills and the employees the balance. Whatever is left over is profit for the owner to either keep or reinvest.
That may not seem like a big difference, and God knows the President didnt see it. But being taxed before expenses is paid is a major deal.
Let us invent a business owner named Gus. Pretend Gus has a company that makes bumper stickers, and has seven employees.
Guss company makes $2 million in sales this year. Due to payroll taxes, earnings taxes, state and local taxes, he pays about 60% of that to the government. This means he is left with $800,000.
Accounts payable is $400,000, which pays his suppliers, rent, landscaping, marketing costs, and so on.
This leaves Gus $400,000 left to pay his seven employees, who earn a combined $304,000 in payroll. That is not a lot, but once Gus pays them, he winds up with $96,000 for himself. Generally, small business owners dont make as much as the employees think. Gus does better than some, sure: but rememberthe Democrats believe he makes $2,000,000 in gross income because thats how it gets reported to the IRS! Yep, Gus is considered a stupid one percenter!
If Gus were allowed to do his taxes like a large corporate entity and deduct the $704,000 in total expenses ($400,000 in AP and $304,000 to payroll), he would be taxed on the $1,296,000 remainder; if that were 60%, he would keep $518,400 in profit. So you see, Gus is screwed by the law.
But the reality is that Gus cannot do that, and he gets left with $96,000. And the President suggested he might get hit with a 3% tax increase to pay for Obamacare in the name of economic patriotism. Here are the results:
Get the picture? Notice his effective tax rate (again, that includes all taxes, not just the 35% Obama thinks he pays, but the state and local taxes, payroll taxes, etc. Effective tax rate in this country is presently an average of about 60%. Less in Texas, more in Illinois.)
By bumping that up only 3%, Gus sees his take-home pay slashed to $36,000. He will make less than any of his employees. Admittedly, some real-life small business owners do much better than Gus; many do less. Romneys point, which is the same point as anyone who actually runs a small business, is that Obamacare will seriously hurt an ungodly amount of businesses.
So what can Gus do? Well, he can lay off an employee. Taking out the $45,000 a year graphic designer will bring Gus back from $36,000 to $81,000not as much as he made last year, but enough to maybe keep the doors open if he foregoes a vacation, foregoes buying his wife a new car, and putting off the new roof his house needs.
This tiny little 3% jump effectively forces Gus to lay off a key employee, which is why Republicans say that fully implementing Obamacare virtually guarantees widespread layoffs across the country. Remember: more Americans are employed by small businesses than large corporations. We arent talking 1,000 people out of work nationally…but a big jump in the unemployment rate. Obama claims he doesnt understand that, but trust us: he does.
Okay, but let us look at that third column. Romney wants to bring the corporate rate down to 25% or lower, as well as reform some other elements. He stated in the debate that an effective 50% tax rate is way too high. Let us say 45%. And if he cuts the 3% Obamacare tax, let us presume the effective tax rate will be 42%. If we change the tax rate, look at Guss profit: almost a half-million.
What do you think Gus will do with that cash?
Sure, he will definitely spend a lot of it on himself. But if he is like most small business owners, he will give each the employees a huge bonus. And he will invest in capital improvements (perhaps a larger space), and even take on some additional employees. Or in fact, if Gus wanted to pocket $120,000 next year under President Romney, he could easily double his head count with what was left.
Any of those solutions puts more money into the economy. One of them rapidly brings down the unemployment rate. And if Gus is smart, and he appears to be, he will expand his sales and marketing staff to increase sales well beyond $2 million and do even more.
And one last time: remember that most businesses in America are like Guss shop.
Which candidate do you think really understands business?