In all of Sen. John McCain's hand-wringing recently over Sen. Barack Obama's tax plan, there's something I have never seen said plainly enough that I'd like to state for the record here:

A small business' marginal tax rate has nothing to do with its ability to create jobs.

Why? Because taxes are on net income, not gross income. Another word for net income, by the way, is profits. In business, your profits are taxed, not your revenues.

Salaries for employees represent a business expense—salaries and other employee expenses are subtracted from gross revenues to determine net revenues.

In other words, if there's any relationship between small-business job creation and higher marginal tax rates on profits, it would be this: Some small business owners would actually be better off hiring another employee to keep net income where you want it.

(That's not to say higher taxes create jobs; only that if you already need another employee and you're facing a higher marginal tax rate, hiring that employee could drop you into a lower bracket.)

Of course, that would only actually matter if Obama had proposed raising the marginal tax rates for small business net income, which he has not. Instead, he's proposed returning marginal tax rates on net income for individuals to pre-Bush levels, beginning with individuals making more than $200,000 a year and couples making over $250,000—in net income.

Now, it's true that a number of small businesses are set up as sole proprietorshipsדS" Corporations and certain "LLCsԗthat cause profits (and losses) to trickle through to the owners' personal tax returns. Say you own an art studio as a sole proprietor, meaning you file the business' profits on Schedule C of your 1040. Checking QuickBooks in December, you note that your total revenues for the year are approaching $500,000, and you've been paying yourself a salary of $60,000 a year. Your other expenses are around $280,000 for rent, employees, supplies, computers, electricity and so on. Now you'll have about $150,000 to report as profits on your Schedule C.

Assuming there are no other mitigating expenses on your tax return (child credits, interest on your mortgage, medical write-offs, other dependents) then something like $10,000 of that income would be taxed at the higher marginal rate after your personal deductions; you'll pay about 3 percent more on the taxes on that $10,000.

Oh, and by the way: You will have made $210,000 gross last year. Score!

McCain has gone on something of a tirade about the fact that Obama's tax plan would tax "23 million small business owners," resulting in the inability of those companies to hire people. But the truth is that (a) hiring people cuts down your taxable income, making the argument ludicrous on its face and (b) fewer than 1 million business owners in the United States have employee shops where the owners report net income directly on their returns. And only 5 percent of those—5,000 businesses—net more than $200,000 a year.

According to FactCheck.org, McCain got the 23 million number by quoting the U.S. Chamber of Commerce's number of total businesses in the U.S., without regard for whether or not they are actually small businesses. Even that number is ridiculously inaccurate, as it includes "non-employer firms" such as freelancers, contract workers and even folks who have minor business income from selling furniture or crafts on the weekend. The accurate number is around 1 million small businesses with employees.

So what, exactly, is Obama trying to do with this plan? Two things, both of which are economically responsible.

First, Obama's plan is a fundamental repudiation of "trickle down" economics. Indeed, when you analyze the way McCain criticizes the plan, it's worth noting that the criticism relies on trickery to make the point. Higher marginal tax rates don't affect a small business owner's ability to create jobs. Jobs are a business expense that lower net income, thus, potentially, keeping small business owners out of higher tax brackets. If the owner needs another employee and hires one, she will experience the added bonus of writing down that expense against profits.

Second, Obama is trying to repair the damage that the Bush administration did to revenues in the United States when he lowered the top bracket rates. The truth is that those marginal dollars on the top wage earners do very little to create growth in the economy, but they can do quite a bit to get us closer to balancing the federal budget and—one day, if we're crazy enough to try it—paying down the national debt.

On Aug. 10, 2008, The Washington Post wrote a story with a remarkable headlineדObama Tax Plan Would Balloon Deficit, Analysts Findԗthat noted that the non-partisan Tax Policy Center claims Obama's tax plans would see the national debt increase by $3.5 trillion over 10 years. What's remarkable about the headline is what's buried in the story later; the same groups finds that McCain's tax plan would increase the debt by $5 trillion over the same time period.

As president, either candidate will need to find ways to cut expenses if he's going to balance the budget, or bring it closer to balance. George W. Bush, even with two houses of Congress, was utterly incapable of the feat. McCain will likewise find it impossible if he doesn't raise revenues. Cuts alone won't do it. Obama knows that, even if his position isn't as popular as McCain's re-enactment of George H.W. Bush's famouse "Read My Lips ... No New Taxes" pledge.

Given the financial woes we're experiencing now, the truth is that either man will need to ask the American people to tighten their belts and contribute to the cause. Obama's plan starts with higher revenues that will help us reach toward balance.

McCain, by contrast, has us starting in a much deeper hole because he's unwilling to ask for any sacrifice.

That, folks, is indeed four more years of the same.

Previous Comments

ID

139680

Comment

Another one from Factcheck.org: Right Change Is Wrong October 24, 2008 A conservative group misleads voters mightily on Obama's tax plans for small businesses. Summary A conservative group called RightChange.com has spent $3 million running ads that largely criticize Obama and his tax plans. They're false: * Two ads say Obama would tax "small businesses" at a rate of "62 percent." He wouldn't. That number is an inflated estimate of the very top tax rate, and it doesn't represent what Obama has proposed. * That false figure includes an increased Social Security tax rate that Obama doesn't support, plus the state income tax rate paid by people making more than a million dollars a year in California. * One ad implies that regular folks just trying to make it as entrepreneurs would be hit with such a rate. But even if this estimate were correct – and it's not – it would affect the wealthiest taxpayers and only 1 percent of those who could generously be considered small-business owners.

Author

DonnaLadd

Date

2008-10-24T16:20:57-06:00