Democratic tax plans: a look from reality

Let’s talk taxes and business. It’s one of the key items in the campaigns of each of the Presidential candidates, and I know its something average Americans are concerned about.

Now let me state something up front. I am a Republican, business owner, Black Puerto Rican, 40 year old man. I am voting for the McCain – Palin ticket. So if you cannot accept any of those thoughts, click away now.

I want to examine one of the tax plans that has gotten huge support and acclaim – that of Senator Obama. In reality this is a tax plan that the Democratic Party has always pushed for most of my life. It can be summed up in the following:

• Tax the rich
  
  
• Tax business
  
  
• Tax the stock market
  

Let me explain in simple terms why this is a stupid plan.

Assume that Senator Obama wins the election. And a Democratic Congress remains in force. And their tax plans are enacted.

First the President Bush tax cuts will be reversed. Based on the votes from earlier this year that would mean that every American making $31,850 or more would have a 3% tax increase.

Now add to this the thought that business taxes increase 10%. And payroll tax increases 3%. And short-term and long-term tax on investments increases 10%. And lastly the minimum wage is increased to say $9.

Middle and low income Americans should rejoice, right? The rich are now paying for everything like some believe they should. The economy will improve and everyone will get nationalized (meaning standardized) healthcare.

So if you were at 28% tax, you are bumped up to 31%, but you are making more money now so it’s ok? Well in a vacuum yes. But in the real world you are out of your mind.

As a business owner I have to pay corporate taxes as well as my personal taxes. So I am faced with a situation where my raw materials cost more, my employees cost more, and I pay more in taxes at every turn.

If I had a business that had revenues of $100,000, and 2 part-time employees, and paid myself a salary here is the rough scenario.

Let’s say that my cost of goods is only 10%, research 3%, location 15%, energy use 15%, corporate taxes are 39% and employees get $7/hr. This is before the tax increase and minimum pay jump. They become 49% and $9 respectively. So if my employees cost $9/hr @ 20 hours a week each they are a minimum of 17% not including tax for them. For simple math let’s just call it 20%.

That’s a total of 112%. Without assuming my cost of goods from other businesses in the same position have increased, or if the price of energy increases (which it has for every year since 1972), I am in debt 12%, or in this example $12,000.

That says nothing of paying myself anything. Add in a modest living of $35,000 for owning the business and you get even more debt – but let’s say that I just have it at no cost to the business – though I am paying at least 31% on that money (including the end of the Bush tax cuts) as well.

So I am now in debt. Where can I cut cost? Raw goods and energy are essentially fixed to me. Location is fixed. Taxes are fixed. I could increase prices of my finished goods or services, but there is no guarantee that consumers will pay the higher price. Plus I still have to pay everything first to even test if consumers will pay a higher price.

So a smart plan is to increase my sale price by no more than 5% - small enough to test if the new price range will work, and most won’t notice it. Still I am short the upfront money to get the goods. The only variable left is to cut what I can affect.

I would need to cut either the number of employees and/or their hours until I can bring costs to just even (and probably take a pay cut). At that point I can see if I can make a profit with the price increase.

Now this scenario is overly simplified, given. [A more realistic view is location 11%, Energy 4%, Advertising 1.2%, Raw Goods 3.2%, Communication 4.2%, Operation 2.35%, Outsourcing 2.2%, Employees 32%, Tax 34% - which nets 94.15% of Revenue. Increase cost of higher taxes means that the 6% profit becomes 11.5% in debt.] But the theory is sound. So please explain to me where the higher taxes benefit the 95% of people that receive a paycheck? They will get more money, but fewer of them will be working – and working less hours with higher expectations at that.

The pressure to make a profit increases exponentially if that company has stock and needs to make a profit for investors. And higher profits than normal since they have to make up for the loss incurred from taxing investments.

People that have investments so they can retire are now hurt as they either have to wait longer to retire, or must lower their quality of life. I don’t mean the CEO’s on television quality of life, I mean papa Joe who built up positions in GE so he could sell it over time to make up the difference between SSI (which will be going bankrupt shortly) and his pension that was cut after the company lost it’s ass in the internet bubble crash.

Feeling cheerful? Taxing the rich sound good still?

Add in the cost of higher raw goods since those companies have to make more money too. Add in the higher cost of energy – either because of higher oil prices or the cost of creating and converting to alternative energy. Remember ethanol is only ¾ as efficient as gasoline, so you will need more of it and thus spend more money for the same usage. Plus building solar plants, wind power generators, research and development of biomass, geothermal, and the rest.

And these costs go up every year.

And don’t even mention paying for healthcare, which employers have to cover.

So someone please explain to me how the Democrats plan to raise taxes will benefit anyone. Like I said earlier, it looks great in a vacuum but I own a business in the real world and it doesn’t look so good there.