23 October 2008

Tax cuts in beer language

This one is making the rounds again, but is worth a second read. Will the "takers" in America discover only too late that the achievers have moved on, or have simply stopped achieving? Then what?

A brilliant explanation of our tax system using actual percentages, the impact of a tax cut, and the public reaction that even Obama should be able to understand:
Suppose that every day, ten men go out for beer and the bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this:

The first four men (the poorest) would pay nothing.
The fifth would pay $1.
The sixth would pay $3.
The seventh would pay $7.
The eighth would pay $12.
The ninth would pay $18.
The tenth man (the richest) would pay $59.

So, that's what they decided to do. The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve. "Since you are all such good customers," he said, "I'm going to reduce the cost of your daily beer by $20. "Drinks for the ten now cost just $80.

The group still wanted to pay their bill the way we pay our taxes, so the first four men were unaffected. They would still drink for free. But what about the other six men - the paying customers? How could they divide the $20 windfall so that everyone would get his 'fair share?'

They realized that $20 divided by six is $3.33. But if they subtracted that from everybody's share, then the fifth man and the sixth man would each end up being paid to drink his beer. So, the bar owner suggested that it would be fair to reduce each man's bill by roughly the same amount, and he proceeded to work out the amounts each should pay.

And so...

The fifth man, like the first four, now paid nothing (100% savings).
The sixth now paid $2 instead of $3 (33%savings).
The seventh now pay $5 instead of $7 (28%savings).
The eighth now paid $9 instead of $12 (25% savings).
The ninth now paid $14 instead of $18 ( 22% savings).
The tenth now paid $49 instead of $ 59 (16% savings).

Each of the six was better off than before. And the first four continued to drink for free. But once outside the restaurant, the men began to compare their savings.

"I only got a dollar out of the $20," declared the sixth man. He pointed to the tenth man,"but he got $10!"

"Yeah, that's right," exclaimed the fifth man. "I only saved a dollar, too. It's unfair that he got ten times more than I!"

"That's true!" shouted the seventh man. "Why should he get $10 back when I got only two? The wealthy get all the breaks!"

"Wait a minute," yelled the first four men in unison. "We didn't get anything at all. The system exploits the poor!"

The nine men surrounded the tenth and beat him up. The next night the tenth man didn't show up for drinks, so the nine sat down and had beers without him. But when it came time to pay the bill, they discovered something important. They didn't have enough money between all of them for even half of the bill!

And that, boys and girls, journalists and college professors, is how our tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start drinking overseas where the atmosphere is somewhat friendlier.

10 July 2008

Barack Obama will hurt growing businesses

In the first post of this series, I discussed how Senator Obama’s proposed tax increases would affect a small business during startup phase. The financial case one makes when determining if a startup is even feasible would be heavily burdened by Mr. Obama’s tax increases, leaving many potential businesses to stall in the ideation phase. Fewer small businesses means fewer jobs. Provided an entrepreneur forges ahead despite these challenges, self-funded growth would be further hampered by Mr. Obama’s proposed increase of capital gains and dividend taxes, and his failure to understand that many small business owners include business income on their personal tax returns, making them seem like individual high earners, even though the expenses often eclipse revenues at first.

This post centers on the growth stage, when a business starts hopping. Expenses are often highest, as the concept has proven out and investments in marketing and infrastructure can be heavy. Senator McCain proposes expensing equipment and technology investments in the first year, rather than amortizing over many years. This simple change should boost capital spending and more quickly reward businesses that make these investments.

The growth stage typically involves hiring, which tremendously benefits the community. Senator Obama’s plan to increase the minimum wage will make it more difficult to justify lower-skilled positions, leading to higher unemployment. These positions are often filled by younger people just entering the workforce, hoping to gain valuable experience to help them land their next, better job. Unfortunately for the next generation of workers, anti-free market minimum wages will delay their progress.

Senator Obama also intends to burden business owners with a “pay or play” scheme, in which they must provide health insurance for employees or pay a fine up to $12,000 per year per employee. This mandate will certainly result in fewer new jobs, a greater reliance on contract labor, and stunted business growth. When the costs of adding people are so high, many businesses will opt to delay or forgo expansion opportunities.

To summarize, Senator Obama’s na├»ve proposals will harm growth-phase businesses in many ways:
  • Investment in growing the business reduced because tax burden on individual filers will jump.
  • Hiring postponed or canceled due to higher, artificial minimum wages, and huge penalties for not provided mandated health insurance.
  • Capital spending would increase under Senator McCain’s plan to allowing expensing of such investments in year one.
Look for a continuation of this theme in my next post.

07 July 2008

McCain campaign event for small businesses

Recently I joined Senator John McCain’s Georgia Small Business Leaders steering committee, and this morning I participated in a press briefing organized by the McCain campaign, with the objective of highlighting the differences between the candidates' economic plans. As this was my first speech of this sort, I asked the campaign folks for guidance. They urged me to personalize the suggested talking points.

As it turns out this was not difficult. Over the next few posts I'll discuss the issues that directly affect my small business, beginning with the basic philosophy of the role of government.

Thankfully starting a business in Georgia isn't hard. The secretary of state makes it easy to register an LLC, and even the IRS simplified obtaining an employer identification number. My business doesn't require a special license, which can be onerous to obtain in some states. I share Senator McCain's belief that the best government is a small government, whereas I have yet to learn of a program or policy proposed by Barack Obama that doesn't involve government growth.

While planning the start-up phase of my business, I understood that my income would drop substantially from my previous corporate gig. To help bridge that gap I’m depending on income from my investments, which are taxed as capital gains. Senator McCain will maintain the current taxes on capital gains, while phasing out the AMT (alternative minimum tax). Senator Obama, on the other hand, has proposed increasing not just capital gains and dividend taxes, but income taxes, Social Security taxes, energy taxes, and business taxes.

The increased burden of Senator Obama’s proposed tax increases would A) make it much more difficult for potential owners to make the financial case of starting their own businesses, and B) reduce the money available for existing owners to invest back in their businesses.

How important are small businesses? In Georgia alone there are ~860,000 small businesses, and these are responsible for an astonishing 98% of all jobs in the state. Senator Obama’s proposal to nearly double the capital gains tax would clearly hurt the 618,000 Georgians who reported capital gains income in 2006.

Taxes aren’t painless, esoteric nuisances that affect only the wealthy. They directly impact business owners’ ability to reinvest in and grow their businesses, and small businesses are responsible for the majority of job growth in this country.

In future posts I’ll note how the proposals of Senators McCain and Obama influence other aspects of small businesses.