From a report in today’s New York Post:
…But who are those wealthiest Americans? Illinois businessman Wilson F. Hunt Jr. recently passed on to me the details of how his small business, which he owns with his wife, will be ensnared in this scheme to soak the rich.
Because his company elects to pay taxes as a Sub-chapter S Corporation, all the companys profits are reported on the couples individual income tax returns as the sole shareholders in the company. They paid almost $1.1 million in taxes in 2010, yet the couple paid themselves only a combined salary of $189,000.
The rest of the income was put into retained earnings, which the company could then use to expand its business the following year.
We can’t raise taxes on them! Otherwise, they’ll go out of business and not create any new jobs! Well, maybe….
Let’s do the math:
- The report doesn’t say whether the $1.1M in taxes is just in Federal income taxes or for all of their income taxes. If the $1.1M refers to Federal taxes, it means that the business earned profits somewhere around $3.5M. I don’t know the Illinois state tax rules, nor whether they had to pay local taxes that got included in the $1.1M figure. As a worst case approximation, if their business were in New York City, their business would have to earn about $2.2M to pay $1.1M in taxes. (Yes, taxes in NYC are that high.) To keep the example simple, and be true to the author’s purported intent, I’ll assume that the Hunts paid $1.1M in Federal income taxes.
- While the business earned, say, $3.5M, the taxes paid don’t give us a clue as to how much revenue it took in. It could have been $5M or $500M.
- The business could have spent that $3.5M on plant and equipment, or hiring additional employees, and paid less tax. But the Hunts elected not to do that.
- If the business had been a Subchapter C corporation, which pays taxes for itself, it would have similarly had to pay a little over $1M in Federal corporate taxes.
- If the ‘Bush tax cuts’ expire through Congressional inaction, the Hunts will have to pay about $1.22M in taxes instead of $1.1M. Yes, it’s $120,000 more, which is not a trivial sum, but their business can demonstrably afford it.
I’ll agree that the tax code really bites when it comes to retained earnings. A business that saves its surplus to use in future years gets whomped. It’s not how business is supposed to work: you’re supposed to borrow to expand your business, so that you can write off the interest. (I find this particularly painful: the bank won’t lend my business 25 cents, so I have to finance everything out of the till.)
My point is that I find it very hard to believe the Republicans’ assertion that tweaking tax rates up–or down–will have a significant impact on employment. There are no vast piles of jobs waiting in the wings to be deployed when tax rates drop 10 percent.