Are $250k Earners Middle Class?

[Deacon923]

Forgive me if I'm wrong, but you're saying that adjusting dividend rate will have no negative impact on small business. That we won't owe any more, won't owe any less? That's like patching a leak but refusing to pump the water out. We are responsible, we employ, and we pay taxes and survive without the bailout money that we provided in the first place. Why are we being ignored again?

I would like to respond to your post but I am not sure I understand it. Unless a small business is organized as a C corp, or unless the small business owns a bunch of C corp stock for some reason, raising the tax rate on C corp dividends wouldn't have any impact on the ability of a small business to hire people or make money for its owner.

I guess if the owner of the business has invested his or her savings in blue chip stocks, increasing the tax rate on dividends would impact the value of the owner's savings, but I think it is hard to draw the line and say that such a policy is therefore "bad for small business". Under that logic any tax increase on anything a small business owner might happen to invest in is "bad for small business" (I recognize, of course, that the official Republican platform is that any tax increases of any kind are bad for everything, including small businesses).

 

[OldGoldandGrobe]

AGAIN. LOL at all morons who continue to argue that $250k is middle class. May you be the first people eaten by the starving masses when Armageddon arrives at your "average" doorstep.

 

[2&2 Slider To Leyritz]

Not to be snotty, but I was not confused at all, I simply responded to to the plain meaning of your post. In any case, you have now clarified that what you are looking for is an additional tax break in the form of lower personal income rates for people who own S corps, over and above the existing S corp tax break that enables them to avoid a 15.3% tax on a substantial portion of their compensation/profits of their enterprise and the existing S corp tax break that exempts S corp income from the C corp double tax.

Personally, I think that adding yet another loophole to the code is going in the exact wrong direction. Your idea might lower tax costs slightly for small business owners but would just increase compliance costs. Under this structure every qualifying business would go sub S and all the owners would want to pay themselves $10 and pay the lower rates on the rest of the business income. The IRS would have to ramp up audits and challenges to owner salaries, and it would create/grow a cottage industry of "consultants" who would sell opinions as to lowball fair compensation.

Instead of adding on yet another loophole, the better approach would be another 1986 style overhaul of the tax code to lower rates and greatly reduce loopholes and complexity. That way, business owners would be freed from the requirement to make business decisions with tax impacts in mind, and reduce their cost of CPAs and lawyers in the process.

A couple of points:

1. I agree that an overhaul of the Code is what is needed. However, as I've said 100 times on here, that simply is not going to happen any time soon in our political environment. It is a waste of time talking about hypotheticals that have no chance of occurring. Because of that, I would prefer to focus on realistic changes that can be implemented within the current structure.

2. As I've also mentioned ad naseum, the word "loophole" is disingenuous. I don't think that word appears anywhere within the Code. Things are permissible or excluded revenues or deductions or credits, not loopholes. Someone may think that someone else's use of a permissible deduction or credit is a "loophole", but it isn't, it is something expressly authorized on purpose. So adding or removing any particular item needs to be viewed simply as whether it should be permissible or not, not under any "loophole" term that applies a negative lable from the outset.

3. With regard to the compliance costs of determining permissible salaries (note the term change from reasonable), those are the types of tasks that the IRS should be undertaking: black and white police-style tasks. Set a permissible range based on geographic averages, and if you fall within that range it is allowed, outside of that range it is not. The problem with our current system is that you have a group of law school also-rans working for the IRS trying to out-think top-of-their-class Ivy League lawyers. Not going to happen. Instead of "closing loopholes", the key term should be "minimizing ambiguity". If ambiguity is minimized, the IRS has a much easier and simpler enforcement task. You either violate it or you don't. The more ambiguity that exists, the more likely the IRS loses.

4. As to my proposed solution and your response, to the extent we have a system that prefers certain taxpayers over others (which we undoubtedly do and, again, that system is not changing anytime soon), I do not see why small business owners are not significantly preferred over everyone else. I think everyone (Obama included) recognizes that they are the engine that drives our economy. They take the most risk, have the least help, and face the most challenges. If I am a small business owner paying myself a permissible salary, my taxes should not be tied to my business income, they should be tied to my profit distributions. Why should I be discouraged from sinking 100% of my profit back into my business by having to pay taxes on it in the year earned? I don't know if I'm going to see a return on those investment dollars, but the government takes its cut on the front end nonetheless. Instead, S-corp income should be tax free until distributed, at which point it should be taxed at a special S-corp dividend rate as I mentioned earlier (or, alternatively, create a deduction for undistributed S-corp income). That encourages reinvestment and maximizes those reinvestment dollars. To me it makes a helluva lot more sense to defer taxation on those profits to let the owner use his own money to grow his own business, as opposed to the government taking a large portion of that money on the front end, only to loan it back to the owner via subsidized loans charging interest the guy. Tax it when it comes out, not when it is collected. Again, we should do everything possible to adjust our tax code to encourage and help small business, not villanize it like we do everyone else with any cash.

 

[TuffaloDeac10]

No, but it wouldn't be very high as I drive a $9,500 Salvage Title 2008 Prius. Even at say $1000 per year on average it would just raise my expenditures to $21k or $10k after collecting rent. It really wasn't hard for me to switch to this lifestyle; compared to SCD and Cookout, I was the spendy one in Alaris.

Fuck. Brilliant. I need to think about trying something similar when it's time for me to buy a car in 2016 or so.

 

[AnonymousDeac]

So caturday never came back? Aww, shucks.

 

[WFFaithful]

I'm getting the feeling that most feel like $250,000 is above average, but not high enough to raise tax rates. Is $500,000 more acceptable, or are we just against higher rates?

 

[Deacon923]

A couple of points:

1. I agree that an overhaul of the Code is what is needed. However, as I've said 100 times on here, that simply is not going to happen any time soon in our political environment. It is a waste of time talking about hypotheticals that have no chance of occurring. Because of that, I would prefer to focus on realistic changes that can be implemented within the current structure. Disagree. I believe there is a building consensus that the code is too complex and needs to be cleaned up. If we can get a fiscal cliff and debt ceiling deal done that removes some of the brinksmanship from Congress for a year, I think our political system has the capacity to do this.

2. As I've also mentioned ad naseum, the word "loophole" is disingenuous. I don't think that word appears anywhere within the Code. Things are permissible or excluded revenues or deductions or credits, not loopholes. Someone may think that someone else's use of a permissible deduction or credit is a "loophole", but it isn't, it is something expressly authorized on purpose. So adding or removing any particular item needs to be viewed simply as whether it should be permissible or not, not under any "loophole" term that applies a negative lable from the outset. I agree with you. Loopholes is, however, convenient message board shorthand for "permissible deduction or credit". I remember being mad when Dick Cheney called S corps a "loophole" because John Edwards conducted his law practice through one.

3. With regard to the compliance costs of determining permissible salaries (note the term change from reasonable), those are the types of tasks that the IRS should be undertaking: black and white police-style tasks. Set a permissible range based on geographic averages, and if you fall within that range it is allowed, outside of that range it is not. The problem with our current system is that you have a group of law school also-rans working for the IRS trying to out-think top-of-their-class Ivy League lawyers. Not going to happen. Instead of "closing loopholes", the key term should be "minimizing ambiguity". If ambiguity is minimized, the IRS has a much easier and simpler enforcement task. You either violate it or you don't. The more ambiguity that exists, the more likely the IRS loses. I agree with your overall comments regarding the proper role of the IRS but as applied to your suggested new tax rate/deduction for S corps, I don't think such bright line rules are possible. A business owner's salary varies widely within industries and within geographies, even between similar businesses with similar revenues. Now add to the mix all the lobbyists who would suddenly become interested in impacting the determination of permissible salaries for particular industries. It's not insurmountable but it seems like a lot of regulatory work for a comparatively small benefit, which leads to my next point.

4. As to my proposed solution and your response, to the extent we have a system that prefers certain taxpayers over others (which we undoubtedly do and, again, that system is not changing anytime soon), I do not see why small business owners are not significantly preferred over everyone else. I think everyone (Obama included) recognizes that they are the engine that drives our economy. They take the most risk, have the least help, and face the most challenges. If I am a small business owner paying myself a permissible salary, my taxes should not be tied to my business income, they should be tied to my profit distributions. Why should I be discouraged from sinking 100% of my profit back into my business by having to pay taxes on it in the year earned? I don't know if I'm going to see a return on those investment dollars, but the government takes its cut on the front end nonetheless. Instead, S-corp income should be tax free until distributed, at which point it should be taxed at a special S-corp dividend rate as I mentioned earlier (or, alternatively, create a deduction for undistributed S-corp income). That encourages reinvestment and maximizes those reinvestment dollars. To me it makes a helluva lot more sense to defer taxation on those profits to let the owner use his own money to grow his own business, as opposed to the government taking a large portion of that money on the front end, only to loan it back to the owner via subsidized loans charging interest the guy. Tax it when it comes out, not when it is collected. Again, we should do everything possible to adjust our tax code to encourage and help small business, not villanize it like we do everyone else with any cash.

Generally speaking I am sympathetic to small business owners. However I think reasonable minds can differ on how much more tax code help they need. "Small business", and especially S corps, are already among the most tax-favored segment of the economy. I have already pointed out the significant advantages granted to S corps over the (generally larger) C corps. There are now and have been in the past multiple programs that allow small businesses to accelerate depreciation and expense equipment purchases that are not available to larger businesses (which largely addresses your issue about re-investing profits into the business). S corp owners can already avoid FICA/FUTA, Medicare and self employment taxes on large chunks of their income. At this point the fetishizing of "small business" is beginning to approach the mythologizing of the "family farm" that has led to huge subsidies to giant agribusiness at great cost to the fisc. The effective tax rate on truly small businesses without large profits, after taking into account all of the above, is pretty low. It is hard for me to understand why the owner of a very profitable business should get even more preferential tax treatment over labor and over publicly traded corporations than already exists.

 

[olddke]

Raise the rates on the top earners, treat all income the same (wages, interest, dividend and cap gains), cap deductions at $50,000 and cut spending dramatically (yes this includes defense and entitlements)and you will see the deficit issue go away and our economy will move forward once all the uncertainty is gone.

 

[Shorty]

Great post. Let's do that!

So we're all in agreement, then.

 

[WFFaithful]

So we're all in agreement, then.

We better let Obama and Boehner know ASAP.

 

[TuffaloDeac10]

Against deduction caps.

 

[TuffaloDeac10]

I've changed my mind on them. Should wait for housing to recover some more and then cut the mortgage interest deduction. Other deductions should go to 12% credits to preserve incentives for charitable giving.

 

[DeaconCav06]

Raise the rates on the top earners, treat all income the same (wages, interest, dividend and cap gains), cap deductions at $50,000 and cut spending dramatically (yes this includes defense and entitlements)and you will see the deficit issue go away and our economy will move forward once all the uncertainty is gone.

Treating all income the same is dumb. There should be an incentive for investing.

 

[DeaconCav06]

Disagree. (And there is an incentive for investing.....you make more money. Lots more money, sometimes. The problem is that some people have to work for money, because they don't have enough of it to sit on their ass and let their money make money for them. These people who to actually work shouldn't be penalized. This is how people like Mitt Romney can make $20 million and pay a lower tax rate than his secretary pays.)

And what about the jobs that the invested money creates?

 

[RJKarl]

Buying shares of going concerns doesn't necessarily create jobs. Demand creates jobs. If there is no new demand for your products, you could have $50B in floating shares that regularly change hands and lose jobs as you become more efficient.

 

[Deacon923]

Buying shares of going concerns doesn't necessarily create jobs. Demand creates jobs. If there is no new demand for your products, you could have $50B in floating shares that regularly change hands and lose jobs as you become more efficient.

This is perhaps the most insightful rj post i have ever read. I will posrep when i get to computer.

Sent from my DROID RAZR using Tapatalk 2

 

[Wrangor]

Buying shares of going concerns doesn't necessarily create jobs. Demand creates jobs. If there is no new demand for your products, you could have $50B in floating shares that regularly change hands and lose jobs as you become more efficient.

Great post. And I want to also point it out because RJ doesn't say that buying shares DEFINITELY DOESN'T create jobs. Instead of minimilizing the issue he broadened it. I agree it is a combined effort of investment and demand. We need both.

 

[2&2 Slider To Leyritz]

And what about the jobs that the invested money creates?

They didn't create that.

 

[2&2 Slider To Leyritz]

Generally speaking I am sympathetic to small business owners. However I think reasonable minds can differ on how much more tax code help they need. "Small business", and especially S corps, are already among the most tax-favored segment of the economy. I have already pointed out the significant advantages granted to S corps over the (generally larger) C corps. There are now and have been in the past multiple programs that allow small businesses to accelerate depreciation and expense equipment purchases that are not available to larger businesses (which largely addresses your issue about re-investing profits into the business). S corp owners can already avoid FICA/FUTA, Medicare and self employment taxes on large chunks of their income. At this point the fetishizing of "small business" is beginning to approach the mythologizing of the "family farm" that has led to huge subsidies to giant agribusiness at great cost to the fisc. The effective tax rate on truly small businesses without large profits, after taking into account all of the above, is pretty low. It is hard for me to understand why the owner of a very profitable business should get even more preferential tax treatment over labor and over publicly traded corporations than already exists.

Because they get screwed more than anyone else at every other level. They are paying the same real property taxes, business personal property taxes, state taxes, etc, and now Obamacare taxes, that the larger companies pay, but without the economies of scale benefits. If a public company is paying a 4% combined real and business personal property tax rate on a 100,000 square foot plant that provides them with a 16% profit margin, that is a much lower burden than a small business paying that same 4% combined rate on a 20,000 square foot plant that gives them a 9% margin. So if you want to say that's their problem then okay, but you end up with a nation of WalMarts, which I think most people would like to avoid.

One other thing - I don't view accelerated depreication as a benefit. In most cases it serves to be an cashflow anchor for a lot of businesses. The equipment purchase is usually financed, so in years 2-5 the loan payments still need to be made, but there is no deduction other than the interest. So if the company has $32,000 of taxable income generating a $10,000 tax bill, but $25,000 of principal payments on the loan, then the company has a negative $3,000 cash flow. Yes, they got the benefit in the first year, but 9 times out of 10 that money had to be spent on other things, not socked away. The biggest problem most small businesses have is focusing on income instead of cash flows, because that is the way our tax system forces them to think. In the absence of my preferred overhaul of the code to focus on consumption (cash flows) as opposed to income, I would prefer an option whereby the business owner could tie depreciation dollar for dollar with the loan principal paydown (but only if a standard amortization of the loan to keep it simple).

 

[RJKarl]

Great post. And I want to also point it out because RJ doesn't say that buying shares DEFINITELY DOESN'T create jobs. Instead of minimilizing the issue he broadened it. I agree it is a combined effort of investment and demand. We need both.

The place buying shares creates jobs is not in the ongoing company in which you invested. It's with the brokerage house or internet site where the transaction happens.

The concept that raising marginal taxes on the top two rates by even 4% would eliminate even one job is as big a scam as trickle down economics. Unicorns are far more real as the belief in them actually creates products and jobs.