From NPR, clarity on the Bush tax cuts

The story didn’t answer a critical question: Why do those businesses with hundreds of thousands of dollars in profits file on individual 1040 Scehdule C’s instead of incorporating and filing corporate returns?

Is there anything stopping them from going corporate if the individual rate goes up on the top bracket?

(hint – they are rate shopping right now. raising the personal rate may just push them to classify themselves as corporations, which is in effect what they really are!)

After all, we aren’t talking about the micro businesses for which incorporation would be seen as a burden. These are substantial companies with multiple employees and hundreds of thousands of dollars in profits.

OK, this post finally pushed me to register here despite my objections to the policy.

This isn’t analysis by NPR, this is repetition of the consistent (and false) GOP talking point. I hear it many times a day out of everybody from Karl Rove to Mike Pence to John Boehner.

The missing bit of info is that income for such small businesses is taxed *after expenses,* not before. I’m one of those so-called small businesses (though making $200K-plus profit only in my dreams). There’s a little thing called “Schedule C” that goes along with your 1040 where you list those expenses, which are deducted from your taxable income.

It’s only those small businesspeople who are paying themselves more than a whopping $200K off the top instead of investing it in the business who are subjected to the additional 4 percent on the marginal rate for income above that.

If they resent paying that extra bit, they can plow it back into their business instead, rather than using it to take one more luxury vacation.

They should also be grateful they’re able to make so much money in an awful economy and don’t have to pay all that much in taxes on it compared to the days when the top marginal rate was 90 percent and the economy was booming.

Jane
(btw, no relation to Jill…)

Pat, good question. Common sense suggests that they incorporate as a way to minimize personal liability in the event of a lawsuit, etc. On the other hand, they may be, in fact, incorporated as “S” corporations – which flow profits and losses (it can go either way) directly through to their shareholders (usually an individual or a small group of individuals). The purpose is to avoid double-taxation, where a company’s profits are taxed first at a corporate rate and the remainder, when distributed to shareholders, is taxed again at a personal tax rate. The IRS explains it here: http://www.irs.gov/businesses/small/article/0,,id=98263,00.html

One of the reasons people don’t incorporate is to not get nailed later by another government entity. For example, here in NH, the Democrat governor, with the help of the Legislature, slipped in a 5% LLC tax into the budget earlier this year. Had my wife created an LLC for her micro business, as I advised and as she should, instead of just filing 1099s on our taxes, which is what we always do, we would have been nailed for about $800 this year … I might add, $800 we don’t have, since we are a family of four living paycheck to paycheck, just like most everyone else. After people realized that the LLC tax 1) was an end run around our no income tax status, and 2) would/could harm micro and small businesses, it quickly disappeared (thankfully).

I’ve had some interesting discussions about the Bush tax cut issue in other online forums and in face-to-face discussions. There really are a few different arguments: 1) Should the Bush tax cuts be allowed to expire; 2) Should they be extended temporarily or permanently; or 2) If allowed to expire, should another proposal be approved that just allows the lower rates for people making $250K.
Personally, if allowed to expire, our taxes go up about $80 a month. This is money we rely on to survive. It is money we spend in the economy, just like most folks. Since 70 percent of economic activity in the United States is retail sales, millions of Americans not spending their $80 a month will hurt the recovery. So, clearly, taxes on people making LESS than $250K should not be raised back up to the 2001 levels, especially with incomes stagnating and expenses rising. Period.

However, here are the two things that need to be studied and discussed in order to have a competent, rational discussion about the future of the Bush tax cuts (instead of relying on political talking points from Republicrats): What will happen to the alleged recovery when the government pulls $350B out of the private sector economy next year, and annually, over future years?, and What guarantee is there that the money will go to pay down the debt and deficit?

Let’s take the latter first: Despite all the shilling that the plan is about deficit/debt reduction, there is no guarantee that will happen. In fact, if we look at history and federal spending, regardless of what party is in power, one could make the case that it is doubtful that ANY will go to deficit reduction. They could spend more money on more wars. They could waste more on corporate welfare. They could use it to finance ObamaRomneycare, since they know they don’t have the money in future years for the program, etc. And, if we really want to tackle the debt/deficit, start to cut spending now. There is so much waste, fraud, and abuse in the federal line items, it’s ridiculous.

The other part – what will happen – is a little more complicated but we know part of what will happen. As I said before, people on the bottom rung of the tax rate ladder will spend less. That will pull money out of the economy and slow the recovery. Will millionaires spend less? Maybe; maybe not, they are, after all, millionaires. But, if they stop investing, have less to put in the bank, which is then less money to lend to businesses and to people for home purchases, cars, etc., that will have a negative effect on the recovery too. Seemingly, it would be like reverse federal stimulus. If the federal government can throw money into the economy to save municipal government and private sector jobs like road crews paving streets, then the federal government taking money out of the private sector economy could potential have a negative effect on job growth in the non-government sector – since economic growth, sales, investment, etc., are the engine that creates those jobs, not government. In other words, every action has a reaction and we should all know what those reactions potentially are.

More data is needed to study this aspect of the argument and not just selective, one-sided charts by think tanks that always advocate for higher taxes and more government spending. Maybe, as a people, we decide that living with a prolonged economic depression is a good thing so long as we punish millionaires. Maybe debt/deficit reduction will actually happen and it will kick the economy into gear. Let’s have that discussion, with all available data and an open mind.

Weak? Hmm, OK. I’m surprised that you can’t find more than my use of a couple of words to deflect the argument. I would guess that it is because you are a partisan and nothing more.
“Millionaires” weren’t the only ones that caused the “recession” … Plenty of ordinary people who over-bought with their homes or had no business buying homes in the first place. Plenty of people who aren’t millionaires who conned people into signing bad mortgages. Plenty of people who watched HGTV and thought they could flip properties endless or put 1 or 2 percent down on speculative condo production. Not everyone was a millionaire. There is plenty of blame to go around.
We’ll agree to disagree that this is a recession and not a depression. A recession is generally described by a decline in GDP for two or more consecutive quarters; a depression is generally described a prolonged period of recession or a severe economic downturn that last several years.
Some of us saw this economy starting to dip in 2007. I first speculated that the economy was collapsing on my blog in August 2007 but saw some of the signs in 2006. Some economists have pointed to the forth quarter of 2006 as the start of the collapse. If that is true, that means we’re coming up on four years or, pretty close to a depression.

Another thumb on the scale of Schedule C vs. incorporation involves factors beyond taxes.

For example, as a sole proprietor/dba, you do not pay unemployment or worker’s compensation on your own salary, only that of your employees. As a self-employed person, you are not eligible for unemployment or worker’s comp. If you do incorporate, you become an employee of that corporation, even if you are the only one.

There is an underlying assumption that most of these sole proprietors are clerical, but that isn’t so. The workers comp rate for clerical is about thirty three cents while the comp rate for a sheetrocker is about eleven dollars. People who make a living pushing sole proprietors into corporations for liabiltiy reasons often don’t research these prices until it’s too late – I met several house painters who had incorprated for liability reasons back when I was an insurance agent with jaws agape when they learned that the government mandated policies for their infant corporation was more than the grossed some years.

Factors like these are important to small business and are not well understood by government.

I truly wish that all employer withholding was abolished so everybody would have to pay quarterly to the government for their taxes, not just the self employed. Discussion of taxation and its burden would take on a very different color if people actually had to write and mail those checks themself.