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According to the Small Business Administration (SBA), there are 28 million small businesses in the United States. Furthermore, the SBA boasts that small businesses provide 55% of all jobs in the US. Most of these businesses pay taxes as S-Corporations, which are pass-thru entities. The S-Corporation doesn't pay any taxes, and the profits (or losses) simply flow through to the shareholder. The taxes on the income earned is then paid at the shareholder’s ordinary tax rate, which can be as high as 39.6%.

President Trump released his tax plan last week, and it was touted as a tax cut for the rich. I would like to take exception to that. For these small business owners, most of whom are considered middle class, it means paying taxes at 15% rather than at a much higher tax bracket.
The question would be, What would these business owners do with their tax savings? They could hire more employees or they could expand their businesses. Do the wealthy benefit from these tax savings? Of course they do. Just think about what could be done with the extra money that a large US company would save.

Currently, C-Corporations, which include most large businesses, pay at a tax rate of 35%. This is the highest business tax in the world. That has caused these companies to move offshore to places like Ireland, where the tax rate is 15%. They have taken their money, their jobs, and everything else with them, all to avoid paying income taxes at a higher clip than in other countries. The money that is made overseas is only taxed in the US when the money is repatriated.
Something that was not included in the proposal, but that has been discussed is direct expensing of investments for businesses.

Currently, these companies that invest in equipment or anything else have to recover the expense of their investment over time. Direct expensing would allow companies to see a true tax savings immediately instead of over a period of time. This direct expensing would be countered with the fact that the company is not able to write off any interest on capital expenditures. However, if you think about it, who cares? The full cost of the investment is being written off in the current year.

The plan discussed last Wednesday discussed a change from seven tax brackets to three. I don't see that happening, but let's entertain the change for a second. What wasn't discussed was the income levels at which these tax brackets would change. Currently, on investments, if you are in the 15% tax bracket or lower, you don't pay any capital gains tax. Would that remain the same?

Historically, tax changes come from the Ways and Means Committee in the House of Representatives. However, could this plan from the President at least jumpstart a discussion on tax changes?
The point here is that when you understand taxes, you will get frustrated when you see headline after headline saying that the tax plan the President promoted is for the ultra-wealthy. Next time you hear that, think of all of those middle class S-Corporations that would benefit as well.
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A couple things. First, the President didn't present a plan - he presented 2 pages of bullet points, which might suffice on the campaign trail but doesn't qualify as the basis for legislation. I don't say this as a form of partisanship but of process. It was the last week of his first 100 days, and the appearance is that the White House wanted to get something into the public space before the weekend. From what I've read, it surprised many in the GOP because the White House had not laid any groundwork in the House or Senate.

Here's a great article from Barron's:

http://www.barrons.com/articles/the-trump-tax-plan-the-good-...

The cut in the corporate tax rate is likely a negotiating starting point, but requires sustained, astronomical growth over the next decade to avoid major deficits. I read somewhere last week we would need an average growth of 9% GDP over the next 10 years. In the first quarter of President Trump's term, GDP grew less than 1%.

The Congressional Budget Office warns the tax cuts are not revenue neutral, and the debt the "plan" would create if the widely ridiculed GDP growth projections do not pan out would be in the trillions. And while the removal of itemized deductions might benefit some low and medium income taxpayers, the ending of the Alternative Minimum Tax would offer significantly greater benefits from the wealthy.

Another consideration from the Barron's article is that the "plan" would disadvantage conventional corporations. Taxed on income as well as dividend/capital gains, their effective tax rate is around 32%, more than twice what small business S Corps would pay.

There is no question a small business can benefit from a reduction in taxes owed, but there's no guarantee that savings will be reinvested in the business, passed onto employees, or to customers. This has always been the problem with trickle-down economics - it assumes people will follow economic theory but the reality is often quite different.

Fuskie
Who thinks you can't look at the question of taxes by focusing on a single aspect of the equation but have to look at the whole picture, which is really, really, really difficult and the reason why comprehensive tax reform has been elusive for so long...

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Disclaimer: This post is non-professional and should not be construed as direct, individual or accurate advice
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The question would be, What would these business owners do with their tax savings? They could hire more employees or they could expand their businesses. Do the wealthy benefit from these tax savings?

Depends on the owner. I have a couple side businesses and most people would consider me rich. If my business taxes went to 15%, it would save me a good chunk of change. Part of it I'd use to expand and up grade my businesses. But a good portion would go to my pocket and allow me to retire more comfortably. Not a bad thing, I'd eventually buy a new car, take some bucket list vacations, update some home electronics, etc.

As far as CBO predictions, take them with a grain of salt. Heard one commentator the other day say if you told the CBO that you're changing the income tax to 200%, what would that do? Answer - double the tax collections.

JLC
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Ultimately, businesses do not pay tax. They are tax collectors by proxy, the tax portion of their cost of doing business is passed along, and many hire tax experts to skim off as much as they can. The real tax payers are wage earners and consumers.

Reducing the amount of tax collected from businesses should enable them to reduce prices and be more competitive globally. The commensurate reduction in tax revenue would have to be made up by increasing income and/or sales taxes, or preferably reducing spending. As long our political leaders can continue to obfuscate the tax collection system and keep business as their whipping boy, we will continue to be taxed into oblivion.
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The cut in the corporate tax rate is likely a negotiating starting point, but requires sustained, astronomical growth over the next decade to avoid major deficits.

How does he propose to generate sustained, astronomical growth over the next decade without sustained, astronomical growth in the burning of carbon, or the sustained, astronomical growth in the production of nuclear waste?
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The taxes on the income earned is then paid at the shareholder’s ordinary tax rate, which can be as high as 39.6%.
...
it was touted as a tax cut for the rich. I would like to take exception to that. For these small business owners, most of whom are considered middle class, it means paying taxes at 15%


You are undermining your own argument.
If the small business owner is paying 39.6% then they have earnings of over $400k.
When you're making >$400k a year I do not think you are middle class. (and I think most people would agree)

"middle class" and "rich" are not terms with hard definitions.
But let's use $150K as a dividing line (why? 1> it's more than 2X median national income **; 2> it's the start of the 28% bracket (below that is 25%)

And with that context we can see that the family making $150k (top end of the middle-class) has their tax drop some (25% max to 15% max)
A "rich" person sees a lot more benefit, dropping from 28% or 33-39.6% down to 15%.
And the average middle-class guy making $70K sees the same taxes.

So your average/median middle-class guy making $75K sees the same taxes, the upper-middle-class gets a small taxcut and the rich guy sees an even bigger tax cut.
Why wouldn't you describe that as a "tax cut for the rich"?
I'd agree that's simplifying it a bit - but seems still reasonably accurate description.


** http://money.cnn.com/infographic/economy/what-is-middle-clas...


Next time you hear that, think of all of those middle class S-Corporations that would benefit as well.
1> you have to believe that S-corps get the benefit and it wouldn't just be C-corps (I wouldn't assume that)
2> you are lumping the middle-class S-corps that don't get a benefit (the many S-corps that earn less than $70k) with those who do (earning $80-$150k/year).

Lastly - IMO this doesn't have a chance of being more than a talking point.
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Thank you for your reply. I said taxes as high as 39.6 percent, and less than 1 percent of all Americans pay tax at that income tax bracket. Middle class would be the married couple with two children making $80,000 a year in their small business, and in the 25 percent tax bracket
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Thank you for your reply. I said taxes as high as 39.6 percent, and less than 1 percent of all Americans pay tax at that income tax bracket. Middle class would be the married couple with two children making $80,000 a year in their small business, and in the 25 percent tax bracket
================================
For 2017, the 25% bracket starts at $75,900 of taxable income.

For the couple you describe, if the $80,000 is their gross income, after a standard deduction of $12,700 and 4 exemptions of $16,200 (4 x $4,050) their taxable income is only $51,100 - definitely in the 15% bracket. And that's without itemizing. For a married couple, it's hard to have much, if any, income taxed above 15% if income is below $100,000.

Bill
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I said taxes as high as 39.6 percent, and less than 1 percent of all Americans pay tax at that income tax bracket.

And that's why I pointed out that the 39.6% is NOT applicable to people that would be called middle class. Someone casually reading your post could easily come to the conclusion that middle-class S-corp businessmen are paying taxes in that range. But in reality a lot (most?) are at that 15% level already - and some have a small portion that is taxed at 25%.


Do you think it's inaccurate to describe it as a "tax cut for the rich"?
If not, why not?

Personally I think having a progressive tax system as we do (or even more progressive) is appropriate/desirable. I see it as the American version of "noblesse oblige"
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Personally I think having a progressive tax system as we do (or even more progressive) is appropriate/desirable. I see it as the American version of "noblesse oblige"

To a certain extent I agree with the "noblesse oblige" idea. However, I disagree with your preferred method of execution. Noblesse oblige is the inferred responsibility to act with generosity, a willful and voluntary act. Paying a tax is neither. While God loves a cheerful giver, the government doesn't care.

JLC
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JLC:

<<<Personally I think having a progressive tax system as we do (or even more progressive) is appropriate/desirable. I see it as the American version of "noblesse oblige".

"To a certain extent I agree with the "noblesse oblige" idea. However, I disagree with your preferred method of execution. Noblesse oblige is the inferred responsibility to act with generosity, a willful and voluntary act."

Hence the use of "the American version of noblesse oblige" given that American capitalism seems to me to devalue or disparage generosity, and often seems more interested in generating political power and/or dynastic wealth rather than philanthropic projects (apart from a few well known examples).

Regards, JAFO
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foo1bar,

You wrote, "middle class" and "rich" are not terms with hard definitions.
But let's use $150K as a dividing line (why? 1> it's more than 2X median national income **; 2> it's the start of the 28% bracket (below that is 25%)


I was wondering if Wikipedia offered any help here. https://en.wikipedia.org/wiki/Household_income_in_the_United...

This page suggests the upper class are the top 1% in income and arguably the top 5% are rich.

The 1% criteria seems to fit definitions casually used by others on other Google search hits.

You also wrote, If the small business owner is paying 39.6% then they have earnings of over $400k.
When you're making >$400k a year I do not think you are middle class. (and I think most people would agree)


This clearly seems to fit the upper class definition, since less than 1% of all tax returns report $400K or more in income.

FWIW I seem to be considered upper-middle class, based on income.

- Joel
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