Tuesday, May 18, 2010

Taxes aren't so bad after all?

Here is a fascinating letter to the editor from the Minneapolis Star Tribune:
Tax hike plan reflective of taxable income

As a tax preparer, I am compelled to correct a common misconception held by state politicians, by a May 12 letter writer and now by the Wall Street Journal ("Democrats always want higher taxes," Opinion Exchange, May 13).

The misconception is usually a variation of this thought: "It would be unwise to raise taxes on incomes over $200,000 because that would include most farmers and small businesses. Because small business creates most jobs, to raise their taxes would be a jobs killer."

Taxpayers do not pay taxes on their income. Taxes are paid on taxable income, or income after tax deductions. A small business may have income of $500,000, but taxable income of less than $75,000. By the time a small business arrives at taxable income, it has already taken deductions for all business expenses, which include employee wages and all payroll expenses. If a small business has a taxable income of more than $200,000, that taxable income is no different from that of a wage-earner employee who has a taxable income above $200,000. By the time a small-business taxpayer arrives at taxable income, he or she has already hired (and will receive a tax deduction for) every employee needed. To reduce taxes at this point will neither encourage nor discourage small businesses to hire additional employees.

There is no rational explanation why a small-business owner should pay a lower tax rate on taxable income than a wage earner or investor or any other taxable income earner.

The letter is completely correct in the technical sense but if you read carefully, you'll realize that what he is really saying doesn't make any common sense. Taxes on small business profits (or as this person calls them - taxable income) is indeed no different than taxes on a wage earner. In fact, a wage earner is nothing more than a very small business owner with 1 employee, selling his product - labor - for a profit. What would happen if you confiscated his profits? He would work less of course.

The assumption in this letter is that employing people is some sort of public service, it is not. The only reason businesses hire anyone is to profit off of their labor, and taxing that profit is a sure fire way to guarantee less job creation.


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