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
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