Guest opinion: Campaign distorted tax impact on small businesses

2012-11-10T00:05:00Z Guest opinion: Campaign distorted tax impact on small businessesBy GARY MERMEL The Billings Gazette
November 10, 2012 12:05 am  • 

I own a restaurant franchise here in Billings, so that makes me one of those small business owners Mitt Romney was referring to during the heat of the presidential campaign when he suggested that ending the Bush tax cuts for household income above $250,000 a year will hurt small business job creators. But truth is, I won’t be affected because my business doesn’t earn enough to get me close to that quarter-million-dollar threshold. Nor do the earnings of 98 percent of all small businesses.

Here’s why:

I don’t pay taxes on the gross amount my business earns. I deduct my business expenses first. The rent, food, payroll, utilities, insurance, etc. All the way down to the brooms we use to sweep the floors. If I have a 10-percent profit margin, I’d need a gross business income of $2.5 million to take home a profit of $250,000.

Even then, before I pay taxes on my profits I get to take my personal deductions. Got a house with a mortgage? Deduct the interest payments. Got kids in college? Deduct tuition costs. Paying into a 401(k) for retirement? More deductions. After all of this is subtracted, I go to the tax tables and figure out what I owe.

Few would pay more

The upshot is that only a fraction of small business owners – between 2 percent and 3 percent – earn enough to have $250,000 in taxable income left after applying all of these business and personal deductions.

Here’s another wrinkle. Tax rates are “marginal”. The guy taxed on $10 million will pay the same amount on his first $250,000 of earnings as he does now. Only the income above that threshold is subject to a higher rate.

Take a small business owner whose profit after deductions is $350,000. The proposed increase applies only to the $100,000 above $250,000. If his current tax rate is 25 percent, he is paying $80,000. That would become $83,000. Less than a 1 percent increase in his overall tax rate.

This guy earns many times more than the now famous “47 percent” (like seniors living on Social Security and active duty service members) Mitt Romney wrote off because their incomes are so low they don’t earn enough to pay income taxes. Changing the tax rate on the business owner would mean he has to live on $267,000 instead of $270,000. Quite a hardship, but I think he’ll manage. I know I could.

Bottom line? The new rates will save the country almost a trillion dollars over 10 years. It will not come from the middle class. It will come from fairly comfortable people, who I would call wealthy, and who could cover any tax increase with a good day in the stock market.

Pay down U.S. debt

A trillion dollars could go a long way. It could strengthen Medicare and Medicaid, be invested in our infrastructure and pay down our debt. It could provide paychecks to people hired to rebuild roads and bridges. Those newly employed workers would pump dollars into the economy, pay more taxes to the Treasury, and be able to eat at my restaurant. I would hire more workers to handle their business, and my workers would pay taxes. My profits would go up and, despite any increase in taxes I might have to pay, my after-tax income would increase. So I travel more, buy more cars, and donate more. Everyone wins.

It’s time to do what’s right for small businesses and the country: end the Bush tax cuts for the richest 2 percent. As a small business owner, I’m all for it.

Gary Mermel owns a restaurant franchise in Billings and also is a practicing anesthesiologist.

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