Small businesses won't be crippled, but higher taxes will impede their growth, says Gene Marks. He offers advice on what to do now to prepare for an increase
The new season of Mad Men has begun. And you know what? I think I have a lot in common with the show's leading man, Don Draper. For starters, we're both running small businesses. His is a growing ad agency in New York and mine is a consulting firm near Philadelphia. We both have difficult clients. We're both dedicated fathers and hard-working guys. We're both very good-looking and do well with the ladies. And we're both paying a lot in taxes. You would think Don's tax bite would be a lot more, though. That's because in Mad Men's 1964 world, the top tax rate was 91 percent. If former President Bush's tax cuts are allowed to expire at the end of 2010, our top tax rate would go up to 39.6 percent. So we're not even close, right? Wrong. This is just one of the myths about the cuts. Most business owners aren't making anywhere near the money that would trigger these top rates. Even so, there seems to be a big gap. Assuming these tax cuts do expire, and President Obama's plan gets approved, a small business owner earning about $200,000 today could look at paying a federal tax rate of around 33 percent. An ad man earning that kind of money in 1964 would be looking at a federal tax rate of about 47 percent. But wait! Was Don Draper paying an extra 10 percent to 12 percent of his income for city and state taxes in 1964 like he would be if he lived in New York today? And was he paying an additional 9 percent of sales and excise taxes on just about everything he purchased back then? Or another 8 percent for FICA and Medicare taxes? Was he faced with surcharges, transfer taxes, highway tolls, and duties like we pay now? Was he paying huge cigarette and whiskey taxes like we have today? That alone would break his budget, along with many of his co-workers'. Taking all this into account, don't believe the myth about higher taxes back in the day. Today's tax burden for the typical small business owner is, and would be, pretty comparable to what the guys at Sterling Cooper Draper Pryce were paying. Frustrating, Not Crippling
Another myth? I'm pretty sure I heard one politician tell a TV reporter on Fox that the expiration of the Bush tax cuts would "cripple" small business. Not exactly. No small business owner I know, myself included, supports any kind of a tax increase, particularly on the heels of the last recession and our currently anemic recovery. But just hold on. The tax cuts really affect families making more than $250,000 per year. And even The Wall Street Journal recently reported that a family with income of $300,000 per year would be paying approximately $3,995 more in taxes under Obama's plan. That sucks. But it's certainly not crippling. That amount may have purchased a Cadillac in 1964. But today it'll buy that family a couple of tanks of gas for their Hummer. And although some deductions and exemptions are being reduced, others are being boosted. For example, the Section 179 deduction for purchasing certain capital equipment would be raised to $500,000 next year if the President's jobs bill is passed. Higher taxes mean less money in my bank account. So naturally that will impede my ability to hire more people, pay higher earnings and benefits, and even make those capital investments. Yes, for most small business owners like me, the effect will be frustrating. But not crippling. Even so, I don't agree with Treasury Secretary Geithner. He's promoting another myth. He supports letting these tax breaks expire because these additional taxes will help fund the stimulus that's helping the economy to recover. I may like to watch Jersey Shore but I'm not a complete idiot. Ask any smart business owner or anyone with access to Google (GOOG) and they'll all tell you that higher taxes impede growth.
So I have differences with the Obama Administration. But that's not to say that the President isn't a supporter of small business. Others are trying to spread this myth, too. I'm not crazy about his economic policies. But he's doing what he believes he needs to do to help business owners. His small business jobs bill proposes to increase SBA guarantees to ease credit and offer credits for new jobs. He's proposing tax incentives to people who invest in small companies. He wants to allow small businesses to be able to carry back losses and get tax refunds from prior years. He's proposing to keep tax rates the same for what he believes is the majority of small business owners. Of course, he could be doing more. Of course, people will argue with his ideas. But to say he's not a supporter of small business is like saying both Don Draper and I do well with the ladies. One of us doesn't. Can you guess who? Making Plans Now
Yes, there are lots of myths about the expiring Bush tax cuts. So what can a business owner do? For starters, many of the business owners I know are cutting back on watching SportsCenter and instead spending a little more time watching C-SPAN. That's because the Bush tax cuts issue will be a divisive one this fall as election season approaches. And what happens will have a big impact on their companies. Like a good ad campaign, many business owners I know are making their plans now, rather than later. If taxes are expected to rise, they'll be ready to take action. Like bringing in the cash before the year's over to take advantage of lower tax rates. And collecting receivables and asking for prepayments. And cashing in their stocks to take advantage of the lower capital-gains rate. As deficits are projected to increase, it's conceivable that taxes will continue to rise. So a lot of smart business owners I know will push their expenses into 2011. They'll defer payments. They'll work out special deals with their suppliers. And they'll become expert about tax deductions. They'll spend more time with their accountants. They'll keep better track of their expenses and formulate better arguments for any aggressive position they may decide to take. These are the plans they're making. Don's lucky to be living in 1964. He's about to see the first appearance of the Beatles, the worldwide premiere of Mary Poppins, and a huge break in federal taxes that year which will spur a giant economic boom. Unfortunately, today's business owner isn't so fortunate. We can't drink bourbon in the office. We can no longer smoke wherever we want. And looking at those big deficits, we can't stop our taxes from going up either. That is no myth.