Keeping taxes low for anyone making over $250,000 a year is a tough case to make, especially with the excesses of Wall Street that are beginning to re-emerge. The regular American taxpayer struggles to give up their 15%-25% of earned income to a Federal Government who then turns around and gives it to corporations who pay lobbyists millions of dollars a year to get preferential treatment in the tax code. One need look no further for an example than the recently exposed mega-conglomerate GE who paid no income tax on a $10 billion corporate profit – all perfectly legal – and requiring a 24,000 page tax return to document all their preferential tax discounts.
Americans are all about fairness – not redistribution of wealth – but fair distribution of wealth based on each individual’s contribution to the economy or well-being of the country in some way. What is going on now doesn’t pass the fairness smell test and Americans instinctively know this.
But is the answer to divide the population by a number picked out of the air?
There are two big obstacles to the $250K baseline proposal. First, the cost of living in various cities around the country varies significantly. Kiplinger reports that the least expensive city in the country is Fort Smith, Ark with a cost of living index of 85.2 and an average home price just 6 times the average household income. The most expensive city is New York with an index of 218 and an average home price12 times the average household income.
Even the federal government recognizes the disparity and provides cost of living “bonuses” for their employees who work in high cost cities or on travel assignment there. While $250,000 in household income in Fort Smith can be considered wealthy and a year’s salary is more than the average price of a home, the same income in New York won’t even qualify you to buy a home.
The biggest disparity is for small business owners
The hardest to explain to the vast majority of Americans who do not own their own small business, is how a $250,000 cap on income destroys businesses and jobs. Most small businesses have a legal entity of Sole Proprietorship, LLC or Subchapter S Corporation. These legal forms of business ownership are less complicated to set up and to administer, and don’t have onerous corporate reporting requirements which would otherwise inundate the entrepreneur with paperwork.
The key is - all the net income shown on the small business’ financial statements passes directly to the owner who then reports that amount on his or her personal income tax return. The business owner does not have that money in his pocket, nor was there ever a check written from the business to the owner for that amount. It is simply the number shown on the bottom of the business’ profit and loss statement at the end of the year – and that amount gets credited to the owner who then has to pay personal income tax on the amount. It is an accounting number – it is not a “cash in the bank” number – and it isn’t even a “net worth of the business” number. It is a set of numbers which represents cash-in minus cash-out over a 12 month period and the difference is the profit or loss of the business.
A business’ profit has absolutely no correlation to available cash or even assets owned or liabilities owed. A small business could be judged bankrupt and still show a paper profit that year requiring the owner to claim that amount as income on his personal tax return.
Back to GE as an example, it would be as if every stockholder of GE were required to claim their percentage of the corporation’s $10 billion in profits on their own personal tax return as income to them even though they never saw a dime of that money.
A conversation with a small business owner in Oregon points out the imprudence of the Administration’s efforts to target small business owners. As a profitable Subchapter S corporation, this entrepreneur had to write a personal check to the IRS for $250,000 on April 15th. Yet, that amount was more than he had taken out of the business for the entire year. The business was profitable, but he wanted to keep the cash in the business in order to expand, pay rent on more space and hopefully hire more people. That quarter of a million dollars could have paid the salaries and benefits for the 4 engineers he badly needs, but now can’t afford. How many jobs will the federal government create with it?
A final lament from this erstwhile entrepreneur is a common refrain, “The Administration thinks I’m super-rich, but I drive a 12 year old Yukon with 170,000 miles on it. My daughter now commutes to college in a used import with 156,000 miles on it. Sure not my idea of rich.”