Robert F. Graboyes

Robert F. Graboyes

Robert F. Graboyes is the senior health care adviser at the National Federation of Independent Business (NFIB) in Washington, D.C.

Only If You Like Killing Jobs

Tax increases are a recipe for wrecking health-care reform and the economy simultaneously. They would increase unemployment, decrease incomes, push up short-term health-care spending and leave long-term spending unscathed. Plus, the whole contraption rests on a spurious definition of who is and is not wealthy, doing its inequitable worst to small business owners and employees.

Let's begin with the spurious "wealthiest Americans:" 75 percent of small business owners (S corps, partnerships, sole proprietors) report business earnings on their individual income taxes. Typically, they reinvest the after-tax portion back into their firms to expand markets, hire employees, build facilities and buy supplies. For many, these new taxes would sap their biggest funding source, choking business growth and job creation. Bad idea in good times; terrible idea in a deep recession.

This tax most severely damages those firms experiencing the greatest success and producing the most new jobs. One-third of small business owners employing 20 to 200 employees earn more than $250,000 (after taxes and expenses). This bill effectively tells them, "Slow down. Don't grow. Don't create so many jobs." Even if an owner takes home very little and plows the lion's share into new jobs, this bill treats him as if he's the guy on the Monopoly board with cash flying out of tuxedo pockets.

In the short-term, the House bill would drive health-care utilization and prices upward. In the long-term, the bill would do little or nothing to push expenditures downward. The House should examine how the 2006 Massachusetts reforms are unraveling. The Bay State sought universal coverage while giving consumers and providers no incentive to economize. This coverage-before-cost gambit now imperils the state's fiscal stability and the state is beginning to dismember health-care reform itself.

President Obama calls the rapid rise in health-care costs "a threat to our economy" and a "ticking time bomb for the federal budget." The House Bill's tax increases would mainly serve to speed up the ticking.

By Robert F. Graboyes  |  July 16, 2009; 12:38 PM ET  | Category:  Taxes Save & Share:  Send E-mail   Facebook   Twitter   Digg   Yahoo Buzz   Del.icio.us   StumbleUpon   Technorati  
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BTW, here's the answer to the question I posed on last week's blog (I changed the $300,000 to $250,000)

"In fact, only 8.9 percent of people with any small business income have incomes of over $250,000 and, thus, would even potentially be affected by these provisions."

CBPP - http://www.cbpp.org/cms/index.cfm?fa=view&id=2697

Posted by: lensch | July 28, 2009 1:10 PM
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Come on, Bob, I'm not going to argue about these nit-picking special cases. Just answer the question, how many people who are really small business owners have take home pay of over $300,000 for any reason?

Posted by: lensch | July 28, 2009 1:04 PM
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Lensch's argument might work for some businesses. It's dead wrong for any whose production process extends over multiple years. Lensch views frugal, patient risk-takers as "fat cats" and proposes seizing the assets they use to create goods, services and jobs.

EXAMPLE ONE: John's business has one mature product (called ABC) and a new product under development (DEF). DEF won't hit the market till 2016. John uses 25% of ABC profits to pay himself a modest salary and hire researchers to develop DEF. As Lensch says, these salaries are deductible business expenses.

But from 2009 till 2015, John puts 75% of ABC's profits in the bank because the really big DEF expenses won't come until 2015. In 2015, he withdraws the money he has saved for six years, builds a factory, hires a sales team, hires production workers and begins producing DEF. With skill and luck, DEF is the big success story of 2016. Or maybe not, and John loses everything. Entrepreneurs take risks.

John lived modestly and carefully saved the funds he knew would be needed in 2015. Lensch implies that John spent those 6 years sailing his yacht and driving his Lamberghini around the Riviera. If Congress makes the same mistake as Lensch, they declare John a "fat cat" and subject him to punitive tax rates that assure he can never accumulate sufficient funds to finance the 2015-2016 launch of DEF. John never bothers to hire the researchers, marketers, construction workers and production line personnel along the way.

EXAMPLE TWO: Jim has a factory that earns $400,000 in 2009. He pays himself a salary of $100,000 and uses the remaining $300,000 to refit his factory with non-polluting technologies. The tax law says he must depreciate that investment over 30 years. That means he can only deduct $10,000 in 2009, $10,000 in 2010, etc. until 2038. After deducting his salary and this year's depreciation, the company shows a profit of $290,000. Once again, Lensch thinks Jim is going on safaris, hiring servants, and eating caviar for three meals a day. Lensch wants Jim to get a huge tax bill, even though Jim has plowed every single cent of the paper profit back into the company.

EXAMPLE THREE: Joe's company earns a $400,000 profit, but this doesn't become obvious until the November data come in. Joe plans to put every cent back into the company, but there's no time to spend it in December. He plans to do the spending in January. But Lensch's logic would tax it all away on the 2009 return because he can't spend it until a month into 2010.

These are just three examples. There are lots more.

Posted by: bob-graboyes-nfib | July 27, 2009 8:59 PM
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Lensch is EXACTLY right.

Trust me (a fellow business owner) -- you have to be really raking it in if your accountant says "sorry, I deducted everything I could think of, and you're still going to be paying taxes on income of $300K this year."

Posted by: gettingdizzy1 | July 21, 2009 11:59 AM
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Graboyes is a paid lobbyist who does NOT represent small business. Small business wants health care reform because they know that they'll save more on reduced premiums than they'll pay in new taxes.

The last thing we need is Enron economics from a convicted supply sider.

Posted by: Garak | July 20, 2009 1:33 PM
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I think LENSCH answered the concern. I say tax the rich to pay for health insurance; after all, every time a Repuganacant is President us middle-classers get taxed to pay the rich.

Posted by: democratus | July 20, 2009 12:57 PM
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Is this really correct? Here a comment that describes what I thought was the way it went:
"If you own a small business and file as an individual, on your Schedule C you get to deduct your operating expenses. That is, the money you spend on salaries, supplies, rent/mortgage, advertising, licenses and fees, depreciation on equipment does not count in your income!
Only if Uncle Joe clears a profit of 300,000 and chooses to draw it out rather than invest in new equipment or whatever would he show an income of 300,000. That is, he's really making 300,000 for himself, same as a "fat cat" who gets 300,000 on a W2. If Joe gets 300,000 in receipts and spends 290,000 of it on operating expenses, then his 1040 shows a whopping 10,000 in income.
Please, let's stop this "small business owners who file as individuals" line -- it ignores how the tax laws really work."

Posted by: lensch | July 17, 2009 4:33 PM
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