Why the "Minimum Tax on Millionaires" Is an Extraordinarily Bad Idea
Making sure that millionaires pay at least some minimum percentage of tax sounds like a really good idea. I mean, by definition "millionaires" -- persons reporting a gross income of one million dollars or more in a year -- must have a lot of extra money. They're rich, right? So the Minimum Tax on Millionaires will just make them pay their fair share. And it won't hurt you or I, since we're not millionaires. Right?
Wrong on all counts. And here's why.
In many, perhaps most cases a "millionaire" -- someone with a gross income of one million dollars or more -- is not simply someone who has a really nice seven-figure annual salary. He is instead a businessman, often a small businessman, who has chosen a sole proprietorship or partnership as the organizational form of his business. And that million-dollar-plus gross income is to a large extent balanced, or even in bad years entirely canceled out, by his expenses, so that his net income may be much smaller than one million dollars. It may even be negative -- in some years, he may be taking a loss.
Who would fall into this category? Many, many small businesses have high overheads, and hence may have both very large incomes and expenses. Restaurants, for instance, can be vulnerable to this, because they have to pay high rents for good locations, lots of insurance for all the things that might go wrong, and hire large staffs. Farmers have to put a lot of money into their fields in order to have any crops at all, and so much of their money is tied up in land and equipment that in a bad year (in which the price of their crops drops close to or below the cost of production) they may have few liquid assets to tie them over. Real estate developers may make a lot of money selling developed properties -- in a good year -- but they had to buy those properties, and hire people and purchase supplies to improve those properties. In a bad year, they may suffer losses.
Now suppose that you are one of these small businessmen -- say a restauranteur with a single big restaurant or small chain of smaller restaurants. Your restaurant earned you $1,100,000 this year. But your business expenses cost you $900,000, so your net income was only $210,000. From this $210,000 you must not only finance any plans for expansion, but also support yourself and your family.
Along comes Obama's new Millionaire Tax. Is this a rate, or a percentage? Obama hasn't yet specified. If it's a rate, then you're paying 39 percent of gross (Obama wants to up this from 35 percent), or $429,000. You are $219,000 in the hole, and if you don't have significant cash, credit or property reserves, cannot pay and must declare bankruptcy (uncollectable status, to be precise). If we assume that it's a flat amount, then it's some unknown amount, but at least you still have some money left over -- at least before your necessary personal expenses.
But of course I've assumed that your restaurants made money this year. Remember, this is a depression we're in. It's just as possible that our hypothetical restauranteur lost money this year -- maybe his gross income was only half as much ($550,000), while his expenses were two-thirds as much ($600,000, remember that some of this was overhead).
Now he's lost $50,000. Under our current tax system, he now owes no taxes (he has no net income) and is probably due some amount of refund (actually this is all done quarterly for a business, but I'm deliberately oversimplifying here). Under a minumum tax system he owes either 39 percent of net, or $214,500, or some (unknown) flat amount.
He's just been taxed on a loss. He may or may not have enough assets to liquidate to make the payment, but he obviously can't do this very often -- real millionaires don't own Money Bins. If he can't do this, he's out of business.
Well, businesses fail all the time! Why do we care what happens to a millionaire? He was unreasonably lucky to be able to own a restaurant in the first place!
Aside from the fact that he probably worked hard and took personal risks to found his restaurant, the reason why we should care is that we may have been WORKING IN his restaurant. What do you think happned to his employees when Obama's tax hike made the restaurant go under? Do you think that Obama gave those employees lots and lots of money? If they were lucky they get unemployment for a number of months, which is to say they get a lot LESS income on which to survive while trying to get other jobs. Which are difficult to find, in an economy whose real unemployment rate (*) is running around 16-20 percent.
There's also his suppliers, who now have lost the income they were getting seeling his restaurant food and other goods and services. And his customers, who now have less choice of restaurants. But compared to the businessman, his family and his employees, those are minor effects.
It doesn't have to be a restauranteur. If you want maximum pathos, think of the farm family turned off their land when it's confiscated for non-payment of back taxes owing. Or if you want to scare yourself, think about your employer. What will you do if he has to let you go because a new tax code insists that he's really making money even when he's barely breaking even? You might be the laid-off employee looking for work in an environment where one-fifth of your fellow Americans are unemployed.
Am I exaggerating? Look around one's home town. Do you see empty storefronts? Each of those was a business, often a small business, which ran over the edge of the margin between income and expenses, and went under.
Do you want to call my argument "trickle-down" economics? You can, but how does that label change the underlying realities? Does a poor man pay your salary? Do mostly poor people buy your goods or services?
Use your brains, please, and help stop this terrible law from going into effect. Bad as the current depression is, it could get worse. And it will, if this law is passed.
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(*) Which means not excluding those who have given up looking for work.
Wrong on all counts. And here's why.
In many, perhaps most cases a "millionaire" -- someone with a gross income of one million dollars or more -- is not simply someone who has a really nice seven-figure annual salary. He is instead a businessman, often a small businessman, who has chosen a sole proprietorship or partnership as the organizational form of his business. And that million-dollar-plus gross income is to a large extent balanced, or even in bad years entirely canceled out, by his expenses, so that his net income may be much smaller than one million dollars. It may even be negative -- in some years, he may be taking a loss.
Who would fall into this category? Many, many small businesses have high overheads, and hence may have both very large incomes and expenses. Restaurants, for instance, can be vulnerable to this, because they have to pay high rents for good locations, lots of insurance for all the things that might go wrong, and hire large staffs. Farmers have to put a lot of money into their fields in order to have any crops at all, and so much of their money is tied up in land and equipment that in a bad year (in which the price of their crops drops close to or below the cost of production) they may have few liquid assets to tie them over. Real estate developers may make a lot of money selling developed properties -- in a good year -- but they had to buy those properties, and hire people and purchase supplies to improve those properties. In a bad year, they may suffer losses.
Now suppose that you are one of these small businessmen -- say a restauranteur with a single big restaurant or small chain of smaller restaurants. Your restaurant earned you $1,100,000 this year. But your business expenses cost you $900,000, so your net income was only $210,000. From this $210,000 you must not only finance any plans for expansion, but also support yourself and your family.
Along comes Obama's new Millionaire Tax. Is this a rate, or a percentage? Obama hasn't yet specified. If it's a rate, then you're paying 39 percent of gross (Obama wants to up this from 35 percent), or $429,000. You are $219,000 in the hole, and if you don't have significant cash, credit or property reserves, cannot pay and must declare bankruptcy (uncollectable status, to be precise). If we assume that it's a flat amount, then it's some unknown amount, but at least you still have some money left over -- at least before your necessary personal expenses.
But of course I've assumed that your restaurants made money this year. Remember, this is a depression we're in. It's just as possible that our hypothetical restauranteur lost money this year -- maybe his gross income was only half as much ($550,000), while his expenses were two-thirds as much ($600,000, remember that some of this was overhead).
Now he's lost $50,000. Under our current tax system, he now owes no taxes (he has no net income) and is probably due some amount of refund (actually this is all done quarterly for a business, but I'm deliberately oversimplifying here). Under a minumum tax system he owes either 39 percent of net, or $214,500, or some (unknown) flat amount.
He's just been taxed on a loss. He may or may not have enough assets to liquidate to make the payment, but he obviously can't do this very often -- real millionaires don't own Money Bins. If he can't do this, he's out of business.
Well, businesses fail all the time! Why do we care what happens to a millionaire? He was unreasonably lucky to be able to own a restaurant in the first place!
Aside from the fact that he probably worked hard and took personal risks to found his restaurant, the reason why we should care is that we may have been WORKING IN his restaurant. What do you think happned to his employees when Obama's tax hike made the restaurant go under? Do you think that Obama gave those employees lots and lots of money? If they were lucky they get unemployment for a number of months, which is to say they get a lot LESS income on which to survive while trying to get other jobs. Which are difficult to find, in an economy whose real unemployment rate (*) is running around 16-20 percent.
There's also his suppliers, who now have lost the income they were getting seeling his restaurant food and other goods and services. And his customers, who now have less choice of restaurants. But compared to the businessman, his family and his employees, those are minor effects.
It doesn't have to be a restauranteur. If you want maximum pathos, think of the farm family turned off their land when it's confiscated for non-payment of back taxes owing. Or if you want to scare yourself, think about your employer. What will you do if he has to let you go because a new tax code insists that he's really making money even when he's barely breaking even? You might be the laid-off employee looking for work in an environment where one-fifth of your fellow Americans are unemployed.
Am I exaggerating? Look around one's home town. Do you see empty storefronts? Each of those was a business, often a small business, which ran over the edge of the margin between income and expenses, and went under.
Do you want to call my argument "trickle-down" economics? You can, but how does that label change the underlying realities? Does a poor man pay your salary? Do mostly poor people buy your goods or services?
Use your brains, please, and help stop this terrible law from going into effect. Bad as the current depression is, it could get worse. And it will, if this law is passed.
===
(*) Which means not excluding those who have given up looking for work.