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Why when you tax the "Rich" you aren't really taxing the rich.
I have a small software and electronics business. I've been in business for about 5 years. I have 2 parners and 1 full-time employee as well as a few contractors I regularily hire. Our business is what you call an S-Corporation. Among other things, this means that the corporate taxes are payed out of my partners and my personal income tax. Over the past 5 years I've never had less than $100,000 as my income according to my tax return...but before you congratulate me on how-well I'm doing realize that that isn't money I get to spend. Most of that has to be saved for things like future investments (The nature of our business is that we develop a lot of projects with only a small percentage of which ever actually end up getting sold, so we always have to have money available for developing prototypes.) in product development and to buy inventory for the next year. In the past 5 years the actual income that I have payed myself out of our business has ranged from $24,000 to $70,000. For example the year my partners and myself payed ourselves 20k we all had over 100k dollars worth of income and payed taxes as if we were in that tax bracket (since technically we did make that money.) even though like I said that isn't money we got to spend on ourselves. Most of the "Rich" that Kerry wants to raise taxes on, aren't really rich. They are people like me who have S-Corporations. Even though my tax return says I make six figures I really don't. Most of my friends would probably be surprised to learn that I have a "six figure income". I live in an apartment not a house. I drive an ordinary car (subaru), etc...I'm not complaining. I love my life. I just want to point out that if Kerry raises taxes on the "rich" he is raising taxes on small business owners like me.
Here is a guy with a similar story to mine. He explains how it is much more eloquentlythan I do. Read it if you want to understand the real implications of raising taxes on the "rich".
The following was taken from [link]http://www.taemag.com/issues/articleID.18082/article_detail.asp[/link]
Quote:
Confessions of a "Rich" Businessman
John Kerry wants to repeal tax cuts for upper income Americans. Now there's a surprise: a Democratic Presidential candidate attacks the rich. But who are "the rich"? Well, as Democratic politicians define the "fortunate few at the top of society," my wife and I are, or close to it.
We're only recognized as rich quadrennially, of course--when campaigns are in full swing. But even if we make the cut solely during election times, it's fun being rich. Wintering in Aspen, summering in Nantucket, luxury cars, fancy prep schools and Ivy League colleges, hobnobbing with movie starlets and marrying heiresses, I'm living large. Oops! No, that's John Kerry's life. Come to think of it, I drive a Ford Taurus, my kids have all gone to public schools, and my vacations usually involve economy motels and breakfast at McDonald's.
Here are the straight facts on my rich household: My wife and I receive income from two small businesses that keep us working literally dawn to dusk, including many weekends. This is not unusual: 85 percent of small businesses pay their taxes on the individual tax return of their sole proprietor.
In 2002, we had a taxable income of $114,175, some $23,000 less than in 2001. Business reverses explain part of the decline; the rest is from increased depreciation allowances in the Bush tax cut. We paid $11,245 in income taxes in 2002, and $13,294 in Social Security and Medicare taxes.
If our Social Security taxes seem higher than you'd expect, that's because we pay at the self-employed rate, which is 12.4 percent until we reach the maximum taxable level. Howard Dean wanted to levy Social Security taxes on all income--which would have meant about a $5,000 tax increase for my family. The "I Have a Scream" speech was greatly appreciated at our house.
Because I received a substantial tax cut when President Bush's reforms went into effect, I must be rich. And John Kerry will certainly have to increase my taxes to fulfill his promises. Families earning over $200,000, whom Kerry has particularly targeted in his tax plan, make up just 1 percent of all taxpayers, and they already pay 43 percent of all income taxes. They simply cannot finance Kerry's entire budget, as much as he would like them to. Plus, well over half of the taxpayers Kerry has targeted for tax increases had business income. He'll be raising taxes on small businesspeople in particular, and that includes my wife and me.
The figures I've shared so far don't really even capture the effect that taxes have on our business, and our lives. In 2002, we deducted $77,214 in depreciation as a business expense; a figure greatly increased by some temporary provisions in the Bush tax cuts. But we spent some $120,368 on capital improvements. Our business is growing--we've just added family members to the enterprise, and will need to generate more sales as a result, so we're expanding. Plus our truck wore out.
These are not unusual situations for a small business. A recent survey found that one in six small businesses had invested at least $100,000 in its company in the last six months. And when a business is growing, as ours has been, it is quite normal for capital purchases to be larger than depreciation. So when business people report income for purposes of taxes, it is very often larger than their cash flow. Thus, because of the way our tax system works, the firms that make our economy grow and provide new jobs are almost always short of cash.
Think about what my depreciation and investment figures mean. Our capital investments require us to lay out hard cash. For tax purposes we get some credit on the other side via the depreciation of our existing equipment, but there is no actual flow of cash to us for that. The net effect, therefore, is that our cash flow--the actual money available to us to pay our bills--is some $43,154 less than our paper income for tax purposes. Our cash flow available for living expenses and taxes wasn't $114,175, but just over $71,000.
From that $71,000 of actual cash flow, subtract our federal tax payments of $24,539 and our state income taxes of around $4,000, and you find that our cash available for living expenses is actually around $43,000. Sufficient for our needs. But clearly a good deal short of true wealth.
I recently filed my W-2 forms, reporting wages on the 30 people who worked for us last year. Our business is seasonal, so most of our employees are part time, but we're one of the largest employers in our small town. Any tax system that encourages our business to grow will add to that payroll. To the extent I can afford to, I will increase both the number of employees and their wages. Our payroll has increased at a much faster rate than our profits. In the last four years, the dollar amount of my payroll has doubled, while our profits have remained essentially flat. That's another point somehow forgotten when tax cuts for the rich are discussed.
Liberals argue that equity demands the rich pay a larger share. Conservatives respond that the money people earn belongs to them, and that taxes drag down business growth. In a strange way, liberal politicians seem to have more faith in free markets than conservatives do--because they act as if we "milk cows" will keep on producing growth and tax revenues no matter what the rate or timing of taxes.
I suppose my wife and I do what we do because we like to. We must, because if you divide our $43,000 of spendable income last year by the 6,000 hours of labor, much of it manual, that the two of us put into our business (we kept track), our time works out to be compensated at around $7.50 an hour. Just the same, incentives do matter. And it is a concrete fact that cash alone fuels our growth. With more cash, our business will grow faster; we're a small player in a big industry, and the market is there for additional growth. We're constrained only by the availability of investment capital, and that has to be generated by our business.
My wife and I have a passion for our little enterprise. It's been our life for 20 years, demanding whatever creative abilities we have, consuming most of our waking moments, focusing our energies on producing the best products we can, and beckoning us to work seven days a week to ensure good service for our customers.
Then every four years the Democratic nominee for President informs us we don't pay enough taxes. We are called greedy and self-serving special interests. We're told that we are "rich," and that we have wealth only because we are lucky.
I have described my financial situation in some detail in the hope that this snapshot will help people understand who most of the top 5 percent of taxpayers really are, and how taxes affect the folks who make America work. I know I'm fortunate, but I certainly don't feel rich. I have fond hopes of some day becoming wealthy (a goal I share with most of my fellow citizens), and a tax policy that encourages my efforts toward that end would not only benefit me, but the rest of society as well. But the reality is that my wife and I have to work extremely hard every day just to hold our current position.
We've been managing our finances with care, investing in our business with the kind of concentration that comes from spending our own money, and providing jobs for dozens of our neighbors. I dare say that the country benefits from our stewardship--and that of hundreds of thousands of other "rich" people just like us--more than it would from any of John Kerry's plans for our money.
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