Torts and liability are not just a problem in the medical industry, but throughout Corporate America. All of America is suffering because of runaway lawsuits. Litigation has taken it's toll more greatly with small business, where the majority of America is employed.
You will not find litigation on this list of top-10 things that will kill a small business. Legal issues fall under the umbrella of poor management and can lead to cash flow difficulties. It can also lead to levels of stress that kill good customer service and synergy between employees. You can see legal issues all over this list.
The dollar cost of litigation on small business is not available in this study from the SBA. According to the report, the majority of legal cases that a small business deals with are for amounts under 10,000. Litigation is part of being in business, and the majority of legal cases are not going to bring most businesses to their knees. It's that occasional big case that causes problems.
The plurality of small business lawsuits comes from contract disputes...about 34% of lawsuits. #2 is torts and liability. #3 is civil rights lawsuits, #4 is a general category which includes prisoner petitions and federal tax disputes. #5 is labor issues and #6 is property rights disputes. These six categories represent 96% of the lawsuits that small business faces each year.
More than half of lawsuits directed at small business are at those that have fewer than 50 employees. At the time of the survey, 95% of businesses surveyed were in business more than 5 years. The majority of businesses sued had revenue over 5 million.
The SBA study said that there are three main causes for lawsuits against small business.
1. Employee Complaints
2. Business-specific claims such as copyright infringement.
3. Customer satisfaction issues.
Here is one place where government spending can create more revenue for the government than it spends. If the majority of business and employment in America is small business, then it would be money well spent to protect small business and keep tax dollars from small business flowing. There is also the economic principle of opportunity cost. What could that dollar that is spent to settle a legal matter be spent on instead?
We have a public defenders office to provide counsel to those accused of crime. Every county has an extension agent to give advice to farmers. It would be money well spent by government to have a small business assistance office in each county to provide advice to small business. There is such a thing on a small level, the NFIB. However, they do very little outside of lobbying. The advice they give is good, but would be more lasting if there was someone to talk to face-to-face. At least, there should be a legal referral service to someone familiar with the laws in the local state. If your business needs help writing a contract, you know who you can retain to ensure the contract prevents a lawsuit.
It is well understood that we live in a litigious society. According to the Public Law Research Institute, the major of wrongful termination lawsuits are dismissed before they ever go to trial. If there is basis for such lawsuits to go to trial, most companies...and wisely so...settle these cases before they to to trial. When they go to trial, the rewards are huge. Usually, the rewards are between 450,000 and 650,000.
Here is where reform can help. Let's say that you are wrongfully terminated at age 45. Does a jury really need to award the plantiff with the amount of money that would have been earned up until the age of 65? Even at age 45, people usually do not stay with a private-sector company for 20 years until they retire in today's society. Such cases could logically be settled at 5 years of lost wages, health care benefits and coverage at an executive-level job-search firm and retraining if that is required to obtain new employment. For the average person, this is around 250,000. This is the type of reform that is needed. We need to prevent run-a-way jury awards. We need to get society away from the "sue someone to get rich" mentality.
For companies with enough revenue to hire permanent legal counsel, this reform may not be needed. For everyone else, however, tort reform is necessary. It could be the difference, for some small firms, between staying open and closing. Until this happens, here is a list, according to the NFIB, of the top 5 things a small business can do to prevent lawsuits.
1. Document everything. Every business conversation--whether with employees, partners or customers--should be put in writing.
2. Create an employee handbook. Employees should know the company policies on discrimination, sexual harassment and such. No employee termination should come as a surprise.
3. Understand intellectual property laws. Know whether or not you have the right to use something that you borrow from another firm.
4. Maintain the business property. Do everything possible to prevent accidents. Purchase accident liability insurance. Have a regular insurance audit.
5. Communicate. Some misunderstandings can be cleared up with a simple phone call or a face to face conversation before they result legal action.
Taking these steps will help prevent the big lawsuits. Even after proper tort reform, this is still good advice.
Step 1--Fix the corporate tax structure.
Step 2--Interest rates and lending
Step 3--Energy
Step 4--Legal Reforms
Step 5--Outsourcing
Sunday, August 26, 2012
Sunday, August 19, 2012
Five step plan to fix the economy...Step 3 Energy
Energy is an input to all facets of the American economy. From pencils to computers, all products use a component of energy to get made and delivered to customers. That is why a solid energy plan is so critical to the economy of the US. And this is something that has been absent since the Reagan administration. Yes, the White House has an energy policy, but how realistic is it?
One expert says that the world is at least 15 years away from real solar energy. Perhaps sometime next decade, most of the electricity in your house will come directly from the sun. But, do we have a bridge to get to the future? We are not there yet.
True, there are some consequences to burning fossil fuels and to nuclear energy, but they are the most efficient sources of fuel that we have at this time. Solar energy and other green sources of power are still in the "Model-T" stage of development and have a long way to go. One day, Solar power will be cheaper than coal. But we are not there, yet.
Some say that we need tax subsidies and help from government to get solar energy off the ground. I propose that we give solar energy the same level of tax help that we gave coal. Enough said.
Economic forces will drive cleaner energy, like it or not. But we do not get there by making it more difficult to deliver conventional sources of energy. The reason this is so is because of the economic principle of opportunity cost. That is a simple principle to understand. If I did not spend this $1 on x, I would spend it on y.
While Obama and his administration have sacrificed traditional energy for green energy, costs have been on the increase. While many of you believe that business simply passes the higher energy costs to you the consumer, it is not completely true. When prices are raised, the law of supply and demand says that less product will be sold. This is exacerbated because the consumer is also paying for fuel and has less to pay for other things. Companies have to find other ways to absorb costs. Eventually they respond by cutting staff.
You see where I am going with this, do you? We have needed a bridge to the future, not a cliff. Even those of us to advocate the use of more traditional sources or energy...coal, oil and natural gas...know that these sources of energy will not last forever and that we need to improve solar and wind technologies. Until the new energy technologies can supply our needs, we need to take advantage of the resources we now have for cheaper and more reliable sources of energy.
When companies spend less money on energy, they have more to spend on other things, such as payroll. When Mr. and Mrs. America spend less on gas in the tank, they have more to spend on luxuries such as food and clothing.
If allowed to expand, the energy industry has plenty of extra cash to hire hard-working, down-on-their-luck Americans. Don't we need to put good people to work? Thousands of people have lost work just for the Gulf Drilling Moratorium.
Just because we allow oil and coal companies to expand does not mean that we are abandoning green energy, it just means that we are trying to be realistic. Reality is, as we have been reminded since the 70s, the supply of fossil fuels is limited and we, sooner or later, need to find something different.
"Drill Here, Drill Now" is not the only answer to the energy problem. We need more refineries. When a fire at a refinery on the West Coast raises the price of gasoline 30 cents, it shows that improvements and upgrades are needed on every link in the supply chain. This is why the Keystone Pipeline is so important. It makes for more efficient delivery from oil field to refinery. We need new, safer and more efficient refineries, where few new refineries have been built in the past 30 years.
We also need to upgrade our coal-burning plants to make them more efficient and less polluting. We have the technology to do this, but instead our current administration insists on shutting them down.
Most importantly, we must develop domestic sources of energy. When we import 60% of our oil from foreign soil, we send 60% of the dollars that we spend on oil and gas outside of the United States. That weakens the dollar. This has consequences for every American, not just those who travel. A stronger dollar will help keep jobs in the US.
There is no telling how a better energy problem will benefit the United States. It's impact will be greatly felt. It may be the most important thing that the President and Congress can work on in the next four years. If there is one industry in the US that has the cash to invest in more American jobs, it is Big Oil. We should not engage in policies that view big oil companies that the enemy of the American People. We should treat this industry like an ally.
Step 1--Fix the corporate tax structure.
Step 2--Interest rates and lending
Step 3--Energy
Step 4--Legal Reforms
Step 5--Outsourcing
One expert says that the world is at least 15 years away from real solar energy. Perhaps sometime next decade, most of the electricity in your house will come directly from the sun. But, do we have a bridge to get to the future? We are not there yet.
True, there are some consequences to burning fossil fuels and to nuclear energy, but they are the most efficient sources of fuel that we have at this time. Solar energy and other green sources of power are still in the "Model-T" stage of development and have a long way to go. One day, Solar power will be cheaper than coal. But we are not there, yet.
Some say that we need tax subsidies and help from government to get solar energy off the ground. I propose that we give solar energy the same level of tax help that we gave coal. Enough said.
Economic forces will drive cleaner energy, like it or not. But we do not get there by making it more difficult to deliver conventional sources of energy. The reason this is so is because of the economic principle of opportunity cost. That is a simple principle to understand. If I did not spend this $1 on x, I would spend it on y.
While Obama and his administration have sacrificed traditional energy for green energy, costs have been on the increase. While many of you believe that business simply passes the higher energy costs to you the consumer, it is not completely true. When prices are raised, the law of supply and demand says that less product will be sold. This is exacerbated because the consumer is also paying for fuel and has less to pay for other things. Companies have to find other ways to absorb costs. Eventually they respond by cutting staff.
You see where I am going with this, do you? We have needed a bridge to the future, not a cliff. Even those of us to advocate the use of more traditional sources or energy...coal, oil and natural gas...know that these sources of energy will not last forever and that we need to improve solar and wind technologies. Until the new energy technologies can supply our needs, we need to take advantage of the resources we now have for cheaper and more reliable sources of energy.
When companies spend less money on energy, they have more to spend on other things, such as payroll. When Mr. and Mrs. America spend less on gas in the tank, they have more to spend on luxuries such as food and clothing.
If allowed to expand, the energy industry has plenty of extra cash to hire hard-working, down-on-their-luck Americans. Don't we need to put good people to work? Thousands of people have lost work just for the Gulf Drilling Moratorium.
Just because we allow oil and coal companies to expand does not mean that we are abandoning green energy, it just means that we are trying to be realistic. Reality is, as we have been reminded since the 70s, the supply of fossil fuels is limited and we, sooner or later, need to find something different.
"Drill Here, Drill Now" is not the only answer to the energy problem. We need more refineries. When a fire at a refinery on the West Coast raises the price of gasoline 30 cents, it shows that improvements and upgrades are needed on every link in the supply chain. This is why the Keystone Pipeline is so important. It makes for more efficient delivery from oil field to refinery. We need new, safer and more efficient refineries, where few new refineries have been built in the past 30 years.
We also need to upgrade our coal-burning plants to make them more efficient and less polluting. We have the technology to do this, but instead our current administration insists on shutting them down.
Most importantly, we must develop domestic sources of energy. When we import 60% of our oil from foreign soil, we send 60% of the dollars that we spend on oil and gas outside of the United States. That weakens the dollar. This has consequences for every American, not just those who travel. A stronger dollar will help keep jobs in the US.
There is no telling how a better energy problem will benefit the United States. It's impact will be greatly felt. It may be the most important thing that the President and Congress can work on in the next four years. If there is one industry in the US that has the cash to invest in more American jobs, it is Big Oil. We should not engage in policies that view big oil companies that the enemy of the American People. We should treat this industry like an ally.
Step 1--Fix the corporate tax structure.
Step 2--Interest rates and lending
Step 3--Energy
Step 4--Legal Reforms
Step 5--Outsourcing
Wednesday, August 8, 2012
Five Step Plan to Fix the Economy...Part 2, Interest Rates
In the late 1970s, America was experiencing a period of stagflation. High unemployment, high inflation and high interest rates. The Fed was trying to fight the inflation by raising interest rates. Rates for durable goods, such as cars and homes were over 20%. The interest rate solution was part of the problem, where monetary policy was part of the solution. Interest rates were so high, that economic activity was stifled. The Fed eventually had to respond by flooding the market with new dollars. With money to lend, banks had to respond by lowering standards so that more people could borrow money. But with interest rates so high, it was worth the risk.
Failing to tighten standards once interest rates became low again is one of the causes of the current economic situation. The reason is that the higher the interest rates, the lower the risk of lending to someone. The lower the interest rates, the higher the risk.
Interest rates today are low, and than means the risk of lending to someone, anyone, is very high. If anyone has tried to purchase a home, recently, they know how difficult it is to qualify. The bank who loans the money for a mortgage has very little room for error.
The conventional wisdom is that lower interest rates spur borrowing. But interest rates that are too low do not spur lending. And that is what is happening today.
The Fed has been keeping interest rates low to spur spending and borrowing, but it is not the Federal Reserve Bank that assumes the risk. Foreclosure is the first big risk that a bank takes when underwriting a mortgae. If there is a 15% chance that a home is going to go into foreclosure, then there is a 15% chance that the banks will lose. Foreclosure is expensive. It involves court costs and legal fees. Homes in foreclosure will sell for a reduced value. It is often doubtful that banks will recover the difference. The only way that banks make money on a foreclosed property is if property values are increasing. Often, the bank takes a big hit on a foreclosed property, even if values are increasing.
The second problem is the rate of inflation. If the inflation rate is 3%, and mortgage rates are 3%, then the bank will still be at a loss due to the cost of processing the mortgage. If the inflation rate is 5% and the mortgage rate is 2% then the bank loses, even if the borrow pays on time.
FHA exists to help banks mitigate the risk. But the real mitigation comes from having the interest rate more closely tied to the rate of inflation. It may sound counter-intuitive, but the fed needs to let interest rates increase gradually. Not back to where they were, just enough to spur lending. It may discourage some people from borrowing, but if more people can borrow, who will notice?
It's just like a friend told me. We needed some tightening in lending, we needed lower interest rates, but the pendulum has swung too far in one direction. It now needs to swing back. Not all the way to where it was. It just needs to retreat back a little.
One of the Fed Banks backs up this opinion piece.
Step 1--Fix the corporate tax structure.
Step 2--Interest rates and lending
Step 3--Energy
Step 4--Legal Reforms
Step 5--Outsourcing
Failing to tighten standards once interest rates became low again is one of the causes of the current economic situation. The reason is that the higher the interest rates, the lower the risk of lending to someone. The lower the interest rates, the higher the risk.
Interest rates today are low, and than means the risk of lending to someone, anyone, is very high. If anyone has tried to purchase a home, recently, they know how difficult it is to qualify. The bank who loans the money for a mortgage has very little room for error.
The conventional wisdom is that lower interest rates spur borrowing. But interest rates that are too low do not spur lending. And that is what is happening today.
The Fed has been keeping interest rates low to spur spending and borrowing, but it is not the Federal Reserve Bank that assumes the risk. Foreclosure is the first big risk that a bank takes when underwriting a mortgae. If there is a 15% chance that a home is going to go into foreclosure, then there is a 15% chance that the banks will lose. Foreclosure is expensive. It involves court costs and legal fees. Homes in foreclosure will sell for a reduced value. It is often doubtful that banks will recover the difference. The only way that banks make money on a foreclosed property is if property values are increasing. Often, the bank takes a big hit on a foreclosed property, even if values are increasing.
The second problem is the rate of inflation. If the inflation rate is 3%, and mortgage rates are 3%, then the bank will still be at a loss due to the cost of processing the mortgage. If the inflation rate is 5% and the mortgage rate is 2% then the bank loses, even if the borrow pays on time.
FHA exists to help banks mitigate the risk. But the real mitigation comes from having the interest rate more closely tied to the rate of inflation. It may sound counter-intuitive, but the fed needs to let interest rates increase gradually. Not back to where they were, just enough to spur lending. It may discourage some people from borrowing, but if more people can borrow, who will notice?
It's just like a friend told me. We needed some tightening in lending, we needed lower interest rates, but the pendulum has swung too far in one direction. It now needs to swing back. Not all the way to where it was. It just needs to retreat back a little.
One of the Fed Banks backs up this opinion piece.
Step 1--Fix the corporate tax structure.
Step 2--Interest rates and lending
Step 3--Energy
Step 4--Legal Reforms
Step 5--Outsourcing
Thursday, August 2, 2012
Five step plan to fix the US economy. Step 1--Corporate Taxes.
Reduce taxes on business. It is true right now that individuals of a certain income have it real good with taxes right now. But if those same individuals make their large incomes with their own businesses, they are getting killed with the corporate tax rate. The Corporate tax rate tables have not been adjusted since early in Ronald Regan's first term. The lowest bracket is at 50,000. If you run a business, and only make 50,000 in revenues minus cost of goods sold, you are struggling mightily. Conventional wisdom is that at 50,000, your take home pay should be no more than 25,000 or about 12.00 per hour. That qualifies a family of 2, a couple with no children, for food stamps. Guaranteed that you are the only employee at that level. You are probably working another job on the side. And your business is paying 7500 to the government. Hard to support a family at that level.
Let's take a look at the current corporate tax level...
Current Tax Rates
0 - 50,000--15%
50,001 - 75,000--7,500 + 25% of the amount over 50,000
75,001 - 100,000--13,750 + 35% of the amount over 75,000
100,001 - 335,000--22,250 + 39% of the amount over 100,000
335,001 - 10,000,000--113,900 + 34% of the amount over 335,000
10,000,001 - 15,000,000--3,400,000 + 35% of the amount over 10,000,000
15,000,001 - 18,333,333--5,150,000 + 38% of the amount over 15,000,000
above 18,333,333--35%
The tax tables do not tell the who story. There are deductions for many things in business, such as deprecation of assets, uncollectable payments due, etc. In reality it is much more complicated than your individual taxes. That is why tax accounting is such a steady business. For this blog, I am going to simplify things a bit. Here is the actual tax rates that you pay at various levels of revenue.
50,000--actual tax bill is 7,500 or 15%
75,000--actual tax bill is 13,750 or 18%
100,000--actual tax bill is 22,250 or 22.25%
335,000--actual tax bill 113,900 or 34%
Anything above 335,000 will work out to be roughly 34%
If your business is making you enough money to earn a decent living, you are paying 22% in taxes or getting real creative at writing off expenses. If we force people to get creative of writing off business expenses, then the government really loses a chance to collect any good revenue. This needs to be fixed, so that the tax level for smaller businesses is realistic. Both the business owner and the government need to come out ahead.
If you do not own a business, this has a bigger impact on you than you may realize no matter the size of the company you work for. A good company will pay taxes before they make payroll. If a company is paying higher taxes, there is less money left over to pay employees. If a company's revenues are 335,000 then they have 221,100 left over for payroll and to grow the business. If the average full-time salary is 40,000, that company can hire 5 employees and would have 21,100 to grow the company. A company with this model is not going to grow very fast.
(According to this table, the average person employed by a small business earned about 42,000 in 2010).
If you triple the levels of the corporate tax table, you give smaller businesses a better chance to grow their company while still sticking it to the big boys. How about a new tax table, for starters.
150,000--actual tax bill is 22,500 or 15%
225,000--actual tax bill is 40,500 or 18%
300,000--actual tax bill is 66,750 or 22.25%
1,000,000--actual tax bill 340,000 or 34%
Anything above 1,000,000 is 34%
Therefore, the same business with revenues of 335,000 would pay 78,500 (40,500 + 35% of the amount over 225,000) instead of 113,900. That company would have 256500 left over after paying taxes. This company would have enough additional revenue to hire 1 additional employee and would have 16,500 left over to invest. Sounds like they are losing when you look just at the bottom line, but 1 additional full-time employee is far more valuable to a small business than 5,000 dollars. 1 additional employee to share in the work load means a lot to a small business.
According to the Census Bureau, 77% of all small businesses have 9 or fewer employees. That represents about 4.6 million companies. If the government cut taxes enough for each of these companies to hire one more employee, there would be jobs for another 1.6 million people. That would reduce the unemployment rate by nearly 1.5%. Would that fix the economy? It probably would help a lot.
This is over-simplified math, and one cannot expect companies to hire just because they have lower taxes, but if corporate taxes are lower, someone is going to have a higher income than they have today and that will give the government a chance to collect a higher tax from an individual somewhere. If someone is not off the dole, some rich guy has a higher income and will pay more in taxes. Let's say that 1 in 5 small companies use their extra money to hire a new employee. That is 320,000 new jobs. That's a good start.
Another benefit to lower corporate taxes for small enterprises is that more individuals will be motivated to begin their own business. Every tree in the forest grows from a sapling. When someone decides to make a go on their own, the job that that person used to have is open for someone else to fill. Either way, the unemployment rate goes down.
Finally, let's look at the effect this has on healthcare. Many of those small businesses are medical clinics. We complain and complain about the cost of health care, but have done little to mitigate the cost. How much does a doctor opening his own clinic make? A medical provider can see about 24 patients per day. The average doctor visit total cost after the insurance discount is around $105. The medical clinic in this model would have a revenue of 630,000. That doctor would pay about 220,500 (at 34%) in taxes before anything else. That is before he pays his staff, before he pays his medical school loans, before he pays for his Mercedes and before he pays for the green fees at his country club. Of course, that is assuming that he collects all of the money owed to him, which is rarely the case for any physician. If there was an adjustment like this in taxes, that doctor's tax bill would be reduced to 140,000.
Think about what that doctor could do with an extra 80,000. He could hire a nurse practitioner or physician's assistant to help out. The clinic could see more patients and the doctor could spend more time with his more difficult patients. He could pay his medical school debt at a faster clip. He could invest in more modern medical equipment. He would have more flexibility to make deals with uninsured patients. He may even reduce his fees.
What if he does buy another car or add on to his house? Likely another small business owner, like a car dealer of a house contractor will get a little more revenue. What if he hides it in a Swiss Bank Account? Well, that is the risk we take when we lower taxes. But aren't the benefits worth the risks. Not everyone with a big wad a cash hides it overseas. Why not ask a doctor in your family what he or she would do with an extra 80,000.
Now, I am not taking about lowering the tax rate on firms that make more than 1,000,000...companies that have about 25 or more employees. Those big boys will still get theirs. With this structure, the government will likely not lose a lot of revenue. Perhaps as a compromise, some of the Bush-era tax cuts could expire to help some democrats vote for the plan. Some of the more ridiculous business write-offs can be eliminated. The purpose of this plan is to give smaller companies a fighting chance at success. Since 2007, 200,000 small businesses have closed their doors. About 1 out of every 8 people who are now unemployed worked for a smaller business. Big business got their bail-out, now it is time to take care of the little guy.
Small companies do not make deals with communities for lower taxes and do ship jobs overseas. Small companies are the heart of the American economy. They hire 120 million people. They keep companies like Wal-Mart and General Motors in business. Their employees buy houses and pay taxes. It's time to give small companies a break.
My rough math says that this will cost the government about 200 billion but save the government about 500 billion in unemployment benefits. Net savings to the government are about 300 billion.
Five-step plan for fixing the US economy.
Step 1--Fix the corporate tax structure.
Step 2--Interest rates and lending
Step 3--Energy
Step 4--Legal Reforms
Step 5--Outsourcing
Let's take a look at the current corporate tax level...
Current Tax Rates
0 - 50,000--15%
50,001 - 75,000--7,500 + 25% of the amount over 50,000
75,001 - 100,000--13,750 + 35% of the amount over 75,000
100,001 - 335,000--22,250 + 39% of the amount over 100,000
335,001 - 10,000,000--113,900 + 34% of the amount over 335,000
10,000,001 - 15,000,000--3,400,000 + 35% of the amount over 10,000,000
15,000,001 - 18,333,333--5,150,000 + 38% of the amount over 15,000,000
above 18,333,333--35%
The tax tables do not tell the who story. There are deductions for many things in business, such as deprecation of assets, uncollectable payments due, etc. In reality it is much more complicated than your individual taxes. That is why tax accounting is such a steady business. For this blog, I am going to simplify things a bit. Here is the actual tax rates that you pay at various levels of revenue.
50,000--actual tax bill is 7,500 or 15%
75,000--actual tax bill is 13,750 or 18%
100,000--actual tax bill is 22,250 or 22.25%
335,000--actual tax bill 113,900 or 34%
Anything above 335,000 will work out to be roughly 34%
If your business is making you enough money to earn a decent living, you are paying 22% in taxes or getting real creative at writing off expenses. If we force people to get creative of writing off business expenses, then the government really loses a chance to collect any good revenue. This needs to be fixed, so that the tax level for smaller businesses is realistic. Both the business owner and the government need to come out ahead.
If you do not own a business, this has a bigger impact on you than you may realize no matter the size of the company you work for. A good company will pay taxes before they make payroll. If a company is paying higher taxes, there is less money left over to pay employees. If a company's revenues are 335,000 then they have 221,100 left over for payroll and to grow the business. If the average full-time salary is 40,000, that company can hire 5 employees and would have 21,100 to grow the company. A company with this model is not going to grow very fast.
(According to this table, the average person employed by a small business earned about 42,000 in 2010).
If you triple the levels of the corporate tax table, you give smaller businesses a better chance to grow their company while still sticking it to the big boys. How about a new tax table, for starters.
150,000--actual tax bill is 22,500 or 15%
225,000--actual tax bill is 40,500 or 18%
300,000--actual tax bill is 66,750 or 22.25%
1,000,000--actual tax bill 340,000 or 34%
Anything above 1,000,000 is 34%
Therefore, the same business with revenues of 335,000 would pay 78,500 (40,500 + 35% of the amount over 225,000) instead of 113,900. That company would have 256500 left over after paying taxes. This company would have enough additional revenue to hire 1 additional employee and would have 16,500 left over to invest. Sounds like they are losing when you look just at the bottom line, but 1 additional full-time employee is far more valuable to a small business than 5,000 dollars. 1 additional employee to share in the work load means a lot to a small business.
According to the Census Bureau, 77% of all small businesses have 9 or fewer employees. That represents about 4.6 million companies. If the government cut taxes enough for each of these companies to hire one more employee, there would be jobs for another 1.6 million people. That would reduce the unemployment rate by nearly 1.5%. Would that fix the economy? It probably would help a lot.
This is over-simplified math, and one cannot expect companies to hire just because they have lower taxes, but if corporate taxes are lower, someone is going to have a higher income than they have today and that will give the government a chance to collect a higher tax from an individual somewhere. If someone is not off the dole, some rich guy has a higher income and will pay more in taxes. Let's say that 1 in 5 small companies use their extra money to hire a new employee. That is 320,000 new jobs. That's a good start.
Another benefit to lower corporate taxes for small enterprises is that more individuals will be motivated to begin their own business. Every tree in the forest grows from a sapling. When someone decides to make a go on their own, the job that that person used to have is open for someone else to fill. Either way, the unemployment rate goes down.
Finally, let's look at the effect this has on healthcare. Many of those small businesses are medical clinics. We complain and complain about the cost of health care, but have done little to mitigate the cost. How much does a doctor opening his own clinic make? A medical provider can see about 24 patients per day. The average doctor visit total cost after the insurance discount is around $105. The medical clinic in this model would have a revenue of 630,000. That doctor would pay about 220,500 (at 34%) in taxes before anything else. That is before he pays his staff, before he pays his medical school loans, before he pays for his Mercedes and before he pays for the green fees at his country club. Of course, that is assuming that he collects all of the money owed to him, which is rarely the case for any physician. If there was an adjustment like this in taxes, that doctor's tax bill would be reduced to 140,000.
Think about what that doctor could do with an extra 80,000. He could hire a nurse practitioner or physician's assistant to help out. The clinic could see more patients and the doctor could spend more time with his more difficult patients. He could pay his medical school debt at a faster clip. He could invest in more modern medical equipment. He would have more flexibility to make deals with uninsured patients. He may even reduce his fees.
What if he does buy another car or add on to his house? Likely another small business owner, like a car dealer of a house contractor will get a little more revenue. What if he hides it in a Swiss Bank Account? Well, that is the risk we take when we lower taxes. But aren't the benefits worth the risks. Not everyone with a big wad a cash hides it overseas. Why not ask a doctor in your family what he or she would do with an extra 80,000.
Now, I am not taking about lowering the tax rate on firms that make more than 1,000,000...companies that have about 25 or more employees. Those big boys will still get theirs. With this structure, the government will likely not lose a lot of revenue. Perhaps as a compromise, some of the Bush-era tax cuts could expire to help some democrats vote for the plan. Some of the more ridiculous business write-offs can be eliminated. The purpose of this plan is to give smaller companies a fighting chance at success. Since 2007, 200,000 small businesses have closed their doors. About 1 out of every 8 people who are now unemployed worked for a smaller business. Big business got their bail-out, now it is time to take care of the little guy.
Small companies do not make deals with communities for lower taxes and do ship jobs overseas. Small companies are the heart of the American economy. They hire 120 million people. They keep companies like Wal-Mart and General Motors in business. Their employees buy houses and pay taxes. It's time to give small companies a break.
My rough math says that this will cost the government about 200 billion but save the government about 500 billion in unemployment benefits. Net savings to the government are about 300 billion.
Five-step plan for fixing the US economy.
Step 1--Fix the corporate tax structure.
Step 2--Interest rates and lending
Step 3--Energy
Step 4--Legal Reforms
Step 5--Outsourcing
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