Why the GOP is Wrong About Millionaire Small Business Owners
Okay, first things first. The title of this post is (intentionally) misleading. This post isn’t about millionaire small business owners.
This post is about the very, very small fraction of small business owners who pay themselves $1m/year or more; the ones that it has been proposed be taxed (along with others earning over $1M/year) to pay for a continuation of a “payroll tax” holiday. I wrote “millionaire small business owners” rather than “small business owners who make $1M/year” because the former scans better.
Second; I don’t know if the the payroll tax holiday is a good idea or not. I like it because it means more money in my pocket, and more money in my employees’ pockets.
I also don’t know if taxing income over $1M/year is a good way to pay for it, or if it needs to be paid for at all. After all, upper income earners have been enjoying a “tax holiday” for last several years, and I don’t see a lot of concern about how that’s gonna get paid for.
Okay, so now that my lying and ignorance are on the table, here’s the meat of this post.
The GOP argument goes something like this:
If you raise the tax rate on income over $1M/year to pay for an extension of the “payroll tax holiday”, some portion of those earners will be small business owners, and faced with a 2% increase on their incomes over $1M/year, these (obviously shrewd and successful) small business owners will decide that the way they will make up for the reduction in their take home pay by not hiring people, using the money their not using to hire people to pay themselves more to make up for what they’ve lost to the additional 2% tax.
This is so stupid it’s hard to know where to begin, I guess I’ll start with something easy, like calculating what a 2% tax increase on income over $1M/year.
For someone making $1,000,001/year, it means an increased annual tax burden of $.02.
For someone making $2,000,000/year, it means an increased annual tax burden of $20K
For someone making $10,000,000/year, it means an increased annual tax burden of $180,000.
That means that a marginal federal tax rate of 37% (the current 35% + the proposed 2%) our very successful, $10M/year small business owner has to pay herself another about another $285K/year to make up for all the money she lost to the 2% tax increase.
Holy moly! Where’s she going to get that money?!?
Never mind not making any new hires! Our very successful small business owner is probably going to have to fire a few people so she can give herself a raise! Oh noes!!!
Except that’s not how very successful small business owners think. If they thought that way they wouldn’t be very successful, $10M/year small business owners.
Very successful small business owners are always looking to get the best value for their money, and taking money out of your business as salary is rarely the best value.
When you take money out of your business as salary it gets taxed and it’s buying power is reduced, as in the example above. You divert $285K from growing your business, but you only actually end up with another $180K to spend.
By contrast, if you use that money to buy more money making assets for your business you get 100% purchasing power, and you’re buying things that make you more money. (And if you’re making $1M/year or more, you’re obviously someone who does a pretty darn good job of deciding when to reinvest in your business, and when to take the money out as salary and take the tax hit.)
Every successful small business owner faces this dilemma: plow the money back into the business (new hires, more marketing, new capital equipment, etc), or suck it out as wages for personal enjoyment and take the tax hit. Any increase in a small business owner’s marginal tax rate is a nudge towards business investment and away from personal consumption.
Sometimes you don’t know what to do: Spend? Or invest? What do you think very successful, $1M/year small business owners do when it’s a close call?
If you think they opt for spending over growing their business, you’ll never be a very successful, $1M/year small business owner.