Thoughts on Tax Reform

It is impossible to escape the constant talk about extending the Bush Tax cuts. On the Income side, the tax increases are going to be rather significant. On the Estate Tax side they may be even higher. I never thought I would be praising George Steinbrenner but when you look at the potential consequences to his heirs, he timed his death rather well. By dying July 13th, it is estimated he saved his family between $350,000,000 and $500,000,000 in Estate Taxes. Actually prompting a couple of members of Congress to call for re-imposing what some of us call the death tax rates at last year’s rate for all of this year. Simply because they think that this missing money is the government’s share of the deceased wealth.

In Ohio the Republican candidate for Lt. Governor was chided in the press for admitting that when she was a practicing CPA, she advised wealthy clients to move to Florida, a state without an Income tax or a Death tax. Of course, the press ignored the fact that she was simply doing what she was being paid to do, provide advice on how to legally save taxes.

Now we hear from the President and some members of Congress that continuing the tax rates which we presently have would cost too much. But don’t they actually mean that the Federal Government will simply collect less Revenue? I guess they must be speaking of the opportunity cost to the Federal Government. I mean if balancing the budget is such a big deal just cut spending, its what you and I do when our revenue falls.

I do have a suggestion that should allow both sides of this debate to do what is right for the American people. For the one side extending the current rates for top earners isn’t fair to the lower earners. In other words the successful have a responsibility to bail out those less successful. On the other side we hear that you will hurt small companies which have chosen to be taxed at their owners personal Income Tax rates rather than Corporate Income Tax rates. A former client and I last year went through an analysis of how many people they would have to lay off as a result of the potentially higher taxes since they were a Partnership and taxed at the partners personal Income Tax rates.

So here is my compromise, extend the tax cuts for all but the highest bracket, BUT EXEMPT ALL INCOME from Schedule C, E page 2, and F from the higher brackets. This would protect those small businesses that transfer their income to their owner’s tax returns through Schedule C (sole proprietors), Schedule E page 2 (Sub-S Corporations & Partnerships) and Schedule F (Farmers).


© Strategic Financial Leadership, Inc. 2010

Recovery Eludes Small Business

The Business Cycle Dating Committee of the National Bureau of Economic Research determined that the present recession began in December 2007, more precisely; the last economic expansion reached its peak in December 2007. Please note that the committee did not report the expansion had peaked until almost one year after the peak. The committee only works from actual indicators and as such have not yet dated the end of the recession. Even if we were to assume that we hit bottom a year ago, this recession would be twice the length of the average post WWII recessions.

Normally during and after economic slumps you will see an increase in the rates of self-employment, as tight labor markets lead fired workers to venture out on their own. Bloomberg Businessweek ran a story dated September 3, 2010 which shows that the actual number of self-employed persons has dropped. There were 8.68 million people working for themselves in August 2010, the fewest since January 2002, according to Labor Department data released in September. That’s down 13 percent from a record 9.98 million reached in December 2006, 12 months before the latest recession began.

So WHY? Banks say that there is a lack of demand for commercial loans, yet there are fewer people working for themselves. Some economists blame the drop in self-employment on lack of bank financing. While others think what we may be seeing is the result of self-employed businesses failing.

Whatever the answer is, these are very unusual economic times. I heard an economist from the Federal Reserve yesterday and he referred to this as a time of Unusual Uncertainty. It’s difficult in uncertain times to look to the future and step out in faith to start a business. I wonder how long the uncertainty will last and how many businesses will not be around because they ran out of cash.


© Strategic Financial Leadership, Inc. 2010