Pushing Hose Up A Hill
By Mitch Berg
Mitch “The Other Mitch” Pearlstein writing in the MinnPost:
Then there’s an old but still important George McGovern op-ed. Writing in the Wall Street Journal in 1992, the South Dakota Democrat talked about how he had bought an inn in Connecticut four years earlier, but which had gone bankrupt in the interim. “In retrospect,” he acknowledged, “I wish I had known more about the hazards and difficulties of such a business, especially during a recession of the kind that hit New England just as I was acquiring the inn’s 43-year leasehold.”Even more candidly and impressively, he wrote, “I also wish that during the years I was in public office, I had had firsthand experience about the difficulties business people face every day. That knowledge would have made me a better U.S. senator and more understanding presidential contender.”
Pearlstein notes that Minnesota wants to raise income taxes on “the rich” to between 9 and 9.25%.
Now, remember – most small businesses, including the ones that put so many Minnesotans into “the rich” category the DFL so wants to mug – are Subchapter S corporations. If you’re a small but successful business – a consultant, a freelance software architect, run a small but successful store, any kind of small business that is unlikely to ever “go public” and sell stock – you are probably an “S Corp”. Which means you pay your “corporate” taxes on your personal tax return. Which makes you “rich”, according to the Minnesota Department of Revenue, while still being “kinda in between” in the real world.
Minnesota wants to make life about 25% harder for those people – in a state whose taxes already verge on confiscatory:
I’m not unmindful of how difficult it is to balance a biennial budget that’s almost $5 billion out of whack. But I’m more mindful and admiring all the time of what it takes to run a successful business and how dependent we are on the men and women who do so here — as opposed to the overwhelming majority of other states with lower tax burdens. (Note: The personal income taxes of many business owners are based on their companies’ revenues.)
So two impertinently pertinent questions:
Do these proposals sound as if they were designed by people who truly know what it takes to conceive, create, and run a business?
Even more to the point, do these plans sound like promising ways of encouraging entrepreneurial people to set up shop in Minnesota and then stick around?
Both of them are rhetorical questions. The DFL’s big stakeholders – the big public employee and teachers unions – are run by people who’ve never had the faintest shred of entrepreneurial interest; indeed, many of them (like my guest on last Saturday’s NARN show, union organizer Alan Maki) actively detest entrepreneurs.
We have government of, by and for big institutions in Minnesota today.
April 30th, 2009 at 8:30 am
25% harder for those people – in a state whose taxes already verge on confiscatory
If business taxes go up even higher, my wife will be faced with a very real dilemma – whether she should shutdown the practice and go work for somebody else. Shutting down the practice would mean vacating the building and letting 4 people go. Which means no property taxes and 4 unemployed people on the dole, instead of paying taxes. Smart Government = oxymoron.
April 30th, 2009 at 9:23 am
JPA:
“Minnesota wants to make life about 25% harder for those people”
Where does the 25% number come from?
JPA:
Why would a small income tax increase force your wife “shutdown the practice and go work for somebody else”? She will still pay the same taxes if her income is the same?
April 30th, 2009 at 9:43 am
Where does the 25% number come from?
Did you read Mitch’s post? Obviously NOT! ’cause that’s a quote from it. Right above! Comprehension problems, or plain reading issues? Maybe you should go read ‘My Pet Goat” instead of this blog.
She will still pay the same taxes if her income is the same?
Do you read what you write, RatioRick? What grade are you in? My son in 2nd grade already knows how %age works. Oh, I’m sorry, do I have to explain to you that % is not ‘0 divided by 0″? You are also showing extreme ignorance and stupidity by implying that business and payroll taxes are the same!
April 30th, 2009 at 10:05 am
JPA:
I was assuming that no one could be so stupid as to think an increase of .25% from 9% to 9.25% would “make life about 25% harder for those people”. There has got to be more than shifting the decimal point two digits to the right.
“business and payroll taxes are the same”
Mitch’s post was about how business income from an S Corp is taxed like other income. I assumed you were bringing your wife up as an example of that. Other corporations do pay a separate tax, but the MN leg is not raising it. Nor would not they have the power to raise any payroll tax, other than the state income tax. So what specific proposed tax increase is worrying her and how would working for somebody else help her avoid it?
April 30th, 2009 at 10:32 am
RatioRick, your ignorance is astounding. Income transfered from sub-S to personal is net income. All business-related taxes she is responsible for have already been taken out – property tax, for one is obscene, based on services provided. If my wife worked for somebody else, she would not have to worry about any of that – just what is taken out of her paycheck. I am not going to be the one responsible for educating you about tax laws and accounting. It is useless since you have proven time and again your inability to comprehend simple mathematical concepts and conventions.
April 30th, 2009 at 10:38 am
RickDFL said:
“I was assuming that no one could be so stupid …”
Let a mirror be your ruler, RickDFL, and your assumptions would come nearer to truth.
April 30th, 2009 at 10:46 am
JPA:
IF my ignorance astounds you it is because you have a very hard time expressing yourself and conveying facts. If your wife is worries about an increase in the property tax her business pays, those are levied by local government not the legislature. Indeed the DFL has complained that by not raising income taxes, the GOP has shifted more and more of the cost of government onto the property tax. To the degree that raising the income tax on those making more than 250K or 300K prevents a property tax increase, that should help your wife.
“If my wife worked for somebody else, she would not have to worry about any of that”. Well sort of. Obviously, her employer has to pay property taxes on their facilities and those costs reduce their earnings which reduce her possible salary. Assuming property taxes go up in equal proportion for for her perspective employer and her s-Corp, she would not save any money going to work for them.
April 30th, 2009 at 10:51 am
Troy:
I should correct myself. I would never assume that you would not be stupid enough to think that 9.25% was a 25% increase from 9.0%.
April 30th, 2009 at 10:54 am
I was assuming that no one could be so stupid as to think an increase of .25% from 9% to 9.25% would “make life about 25% harder for those people”.
The top personal tax today is not 9%. It’s (as I recall) 7.5. Going from 7.5 to 9 is – whoops, math flub, “only” 20% higher. Of course, if the house gets its way I’m still right.
April 30th, 2009 at 11:08 am
Got you. Your right that the new top rate will be 20-25% more than the old top rate, but it will only apply to the amount of income over the top tax bracket of 250K or 300K. You would have to make more than a million $s to get anything like an overall 20-25% increase is your state taxes.
April 30th, 2009 at 11:30 am
Property tax was just an example of one of the myriad of taxes and fees levied by all levels of government and their agencies my wife has to pay. Ever heard of MNncare tax and how it works? No? Did not think so!
Obviously, her employer has to pay property taxes on their facilities and those costs reduce their earnings which reduce her possible salary. Assuming property taxes go up in equal proportion for for her perspective employer and her s-Corp, she would not save any money going to work for them
You have never been out in the real world, never mind running a business, have you? Concept of apportioning is completely lost on you. And no, you did not site a correct example in your quote above – your assumptions are deeply flawed.
However, I just realized something, since you do not know the minute details of particulars of my wife’s business, you really have no basis for assumptions. So anything you say about my case will be wrong, regardless. All I can say is that if state or feds keep levying more taxes on my wife’s business, 4 people may lose their jobs and all levels of government will lose a portion of their revenue stream. I cannot say it simpler then that.
April 30th, 2009 at 12:01 pm
JPA:
“Property tax was just an example of one of the myriad of taxes and fees”
OK, but how do they affect her more than some other larger business?
“Ever heard of MNncare tax” Sure. It is one the most regressive taxes in MN. It is tolerable when used to provide health care to working families, but no Democrat wants to let the Governor use it as part of the general fund. Presumably the MNCare tax would be the same in solo or a larger practice.
“Concept of apportioning is completely lost on you.” I described how a business would apportion part of their property tax to an employee. If a large employer uses space more efficiently and has lower property taxes costs per person, then, to that extent, it is good for your wife to switch.
“All I can say is that if state or feds keep levying more taxes on my wife’s business, 4 people may lose their jobs and all levels of government will lose a portion of their revenue stream. I cannot say it simpler then that.” If your wife does the same amount of work, she will need the same help and the four people will keep their jobs, just work for a different employer. If the employer is more efficient and can help your wife do the same work with fewer employees say 3, some may lose their job. But job loss do to greater efficiency would be a good thing. That person is now free to produce additional goods and services.
It is certainly plausible that certain taxes hurt small business owners disproportionately and drive them into larger businesses. But an income tax increase would not be one of them.
April 30th, 2009 at 12:28 pm
Obviously justplainangry doesn’t understand his tax situation and needs RickDFL, who knows nothing about taxes other than that they are other people’s money that he’d like to spend, to tell him how they work.
Gimme a break.
April 30th, 2009 at 12:31 pm
But an income tax increase would not be one of them.
Rick, do you have any idea what a Subchapter S Corporation is?
Or was George McGovern just another ignorant conservative rube?
April 30th, 2009 at 12:55 pm
Mitch
“Rick, do you have any idea what a Subchapter S Corporation is?”
Sure, I have actually had to decipher a K-1.
April 30th, 2009 at 1:08 pm
RickDFL said:
“I should correct myself.”
And you should do so more often. Like when you blathered:
“It is certainly plausible that certain taxes hurt small business owners disproportionately and drive them into larger businesses. But an income tax increase would not be one of them.”
April 30th, 2009 at 1:27 pm
Troy:
I would be happy to correct my statement if you can provide a reason why it is wrong. Suppose A earns 500K from an S-Corp small business. B earns 500k in salary from IBM. Don’t both pay the same amount of tax?
April 30th, 2009 at 1:31 pm
But job loss do to greater efficiency would be a good thing. That person is now free to produce additional goods and services.
In a shrinking economy? What planet are you on? There ain’t no hole deep enough you do not try to dig deeper!
April 30th, 2009 at 1:37 pm
Suppose A earns 500K from an S-Corp small business. B earns 500k in salary from IBM. Don’t both pay the same amount of tax?
NO! It is not that simple. You are comparing apples and hand greandes.
And if you cannot understand any part of NO! go educate yourself and then come back when you are ready.
April 30th, 2009 at 2:55 pm
Rick,
There are many different variations of answer to your various questions.
You are right, to the extent that 500K in net is 500K in net, no matter where someone works. However, an S-Corp proprietor needs to gross more than the employee to land that net payment, due to the various self-employment taxes. Remember – Minnesota is really bad for business taxes no matter what type of corporate entity (C-Corp, S-Corp, LLP, LLC, PA or any of the various sole or partner proprietorships) one has. I’ve been out of the S-Corp racket long enough that I’ve forgotten how paying one’s own healthcare affects this – but it’s also a problem.
Increasing taxes on “the wealthy” as well as businesses smacks S-Corps and LLCs and smacks them hard.
April 30th, 2009 at 3:49 pm
Mitch:
“due to the various self-employment taxes”. Well neither simple S-Corp shareholders nor S-Corp shareholder/employees would pay these. I suppose you would have to pay them if you worked as an independent contractor for an S-Corp, but ICs would have to pay them no matter who they worked for. An independent contractor does pay their employer’s share of FICA, but their supposed to make that up by tacking the cost onto their charge. The self-employment tax is meant to equal what you + your employer would have paid in FICA if you had been on salary.
“Increasing taxes on “the wealthy” as well as businesses smacks S-Corps and LLCs and smacks them hard.” a. the current proposal of the House and Senate involves raising some income tax but not raising the corporate tax rate. b. Any income tax increase would have no affect on the self-employment tax. c. however hard the new tax hits s-corps it still hits those with an equal salary just as hard.
May 1st, 2009 at 11:13 am
So this:
“It is certainly plausible that certain taxes hurt small business owners disproportionately and drive them into larger businesses. But an income tax increase would not be one of them.”
becomes this:
“Suppose A earns 500K from an S-Corp small business. B earns 500k in salary from IBM. Don’t both pay the same amount of tax?”
in RickDFL World?
How do I cut through the stupid? I mean, how much more work did the S-Corp owner do to get the same amount of money? A reduction in a persons ROI for their time and effort “would not be” something that could “drive them into larger businesses”?
Ignorance must be your goal, so revel in your achievement.
May 1st, 2009 at 4:09 pm
Troy:
“I mean, how much more work did the S-Corp owner do to get the same amount of money”. The janitor who earns 25,000 a year is salary cleaning buildings works a lot harder than the trust fund kid who collects 25,000 in S-Corp income. Some people work harder for S-Corp income, some work harder for salary income, it all depends on the job.
“reduction in a persons ROI for their time and effort “would not be” something that could “drive them into larger businesses”?” Not if they face the exact same loss of ROI working for the larger business.
May 2nd, 2009 at 11:46 am
RickDFL said:
“The janitor who earns 25,000 a year is salary cleaning buildings works a lot harder than the trust fund kid who collects 25,000 in S-Corp income”
Hey, thanks for missing the point and the examples from RickDFL World (“party time, excellent”). The S-Corp owner would be comparing what they invest and receive as an owner vs. as an employee. It was not an invitation to indulge your class warfare fantasies.
“Not if they face the exact same loss of ROI working for the larger business”
Which would probably only happen in RickDFL World (“wOoOoOoO!”).