Greed, Envy, and Taxes

A guest post by Mickey Ellison:

 

We have all heard of the seven deadly sins. Wikipedia breaks them down simply. Wrath, greed, sloth (lazy), lust, pride, envy, and gluttony. We could spend hours discussing each of these, but for the purpose of this writing, we will focus on two: greed and envy.

In my opinion, the state and federal income tax is possibly the greatest hindrance to economic growth. To have this conversation, some of you will have to open your mind because envy will creep in to cloud your judgment. How many times have we heard that the rich should pay more and our way of doing that is through the income tax?

The US tax code is well over 70,000 pages in length, so forgive me if I don’t have everything perfect. Check this out! According to the Small Business Association, in 2012 small businesses made up about 99.7% of U.S. employer firms. That isn’t 99.7% of employees, but rather 99.7% of those that employ people. If I read that right, .3% of actual employer firms are large businesses. Yet, only 49.2% of employees work for small businesses which means 50.8% of the employees work for large firms. Now, let’s not get caught up in the numbers, but if you want more information on the statistics, visit this site.

This is where your mind must open. Small businesses with new innovative ideas can become a real threat to large businesses. How many of us that were alive in the 1980s would have ever thought Walmart could ever squash K-Mart? That was unthinkable, but fast-forward 30 years and that is exactly what happened.

Every large business we see out there like Walmart, GE, and Microsoft started out as small businesses. Sam Walton started the largest retailing company in the world in — of all places — Bentonville, Arkansas. Do you think K-Mart was worried about this hick in nowheres-Ville becoming a real threat? Of course not, but Sam Walton did become a major threat to K-Mart non the less.

Now, if I were a large business that didn’t want to become the next K-Mart, what could I do to prevent that from happening? One way would be to continue to get better at what you do, or another would be to influence laws that make it impossible for the next Walmart to even exist. Unfortunately we can see the choice that most make is using the power of government to protect them. Influencing politicians can possibly make it easier to squash the competition privately while appearing to be on the side of the little guy. I think a 70k page tax code is proof of that! Greed!

Those evil large companies that we love to hate, along with the help of politicians, prey on another of the seven deadly sins, envy. They can get the ignorant masses in such an uproar, that the companies’ greedy scheme can be pushed by the envy of those same masses, and do it all in under the idea of fairness. Seeing how this could work will take some understanding of the tax code, and hopefully you can see how the income tax can kill the entrepreneur that could eventually threaten the behemoth that we also love to hate.

Sowell

So, let’s dive in. The average American that is an employee understands the income tax differently that the average American small business owner. Let’s look at the average American tax payer. You get your paycheck from your employer, and you have had your state and federal taxes withheld for you by your employer based on how you filled out your W-4 form when you were hired. After those withholdings are taken out, the employer also withholds the amount that you are required to pay for your benefits and what you have chosen to contribute to a 401(k) if you have one. After all of that is done, you have your take home pay. Sometime between January and April 15th, you file your taxes with the IRS, and you are told how much you will receive in a refund or if you owe more. That’s pretty much the extent of it. Stop for a moment to thank your employer for mailing that check to the IRS and state to pay your taxes. It’s an ingenious system because most people really have no idea what they really pay in taxes since they personally do not have to write the check, but that isn’t the point of this post.

Now, let’s take a look at the average American small business owner. Most of them are not your CEO that we see on television, rather they are often our next door neighbors. People like the local plumber, the local hometown restaurant owner, and back in the day the local gas station owner. Many of them have no employees or often less than 10. How does their taxes work? First they must make a profit, and that isn’t a given, but let’s assume that they do. The example that I will use is a plumber that makes $100k a year as a sole proprietor and has no employees. My first question is how many of you know what a self-employment tax is? When you get your W-2 income, your employer withholds social security and Medicare and that adds up to about 7.5%, but did you know that your employer is required to match that? Do the math! That’s about 15%. The real number for 2014 will be 15.3%. If you own a business as a sole proprietor that is an immediate 15% off of the top of your income. On $100k, he/she owes $15,000 and we haven’t even gotten to income taxes yet. After paying the $15,000, there is $85,000 left to be taxed according to our progressive tax system. Below I will do the math on that:

$0-9075 is taxed at 10% and that equals $907.50
$9076-$36,900 is at 15% that equals $4,173.75
$36,900-$89,350 is at 25%. Since he only has $85,000 that is subject to income tax, the amount due is $12,025.

And, if you happen to live in a state that has an income tax, he has that to pay as well. For this example let’s use 5%. In many states it’s higher, but this works for the example.
On $85,000 that comes up to $4250. For those of you being technical now, I know you can write off the state taxes against your federal taxes, but play nicely.

Now let’s add them all together:
$15,000
$907.50
$4173.75
$12,025
$4250

________
$40,605.50 is your grand total, leaving him $59,394.50.

What would he do with that $40k if he could keep it? That’s anyone’s guess, but let’s look at some possibilities. First, he might simply spend it. Maybe he buys a car. Buying that car pays the salesperson a commission, the car lot makes a profit, and the manufacturer can make another car to replace that. They pay the assembly line worker, the mechanic, the company that produces the upholstery. The upholstery company makes a profit, and they have to employ someone to make the upholstery, but because $40k in taxes were withheld, none of this business takes place.

What if he hired another employee and paid them the 40k. The business may grow faster, creating more profit, and that results in more money being spent or maybe even another employee that could help the company grow even more. The employee will spend the money on something. Let’s say food at the supermarket, that can pay the cashier, the butcher, the baker, the truck driver, the packaging plant, the farmer, the seller of fertilizer, and the list goes on and on. None of this takes place because the government plundered the business owner for over 40% of his profits.

When income taxes are raised, these are the people that get hurt. Not Warren Buffett or Bill Gates! Not Walmart or Costco! What it does do is prevent some entrepreneur from creating something better than Walmart or at least makes it more difficult. In the end, the large companies are more likely to absorb these taxes by passing them on to the employees, but what really happens if the small business owner is priced right out of business. This discussion doesn’t even take into account the numerous regulations and rules that hinder economic growth.

If there is one thing to remember from this article, I would say think beyond the rhetoric of politicians and large mega-corporations. Think about the small business owner when you get caught up in the emotion that politicians use against us. The next time you or I complain about having to go to Walmart and we wonder where the local dime store went, hopefully you are starting to know now. Almost every new tax law or regulation will have the opposite effect than what is being sold. This is why the Walmarts can get larger, and this is why the too big to fail banks have gotten even bigger. The American dream of owning one’s own business will become a fantasy because we allowed greedy politicians and business men to cause us to commit one of the seven deadly sins, and that is ENVY.

by Mickey Ellison

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