Memorandum
ID:
Section Leader: [Section Leader Name]
Re: Obama’s Small Business Tax Increase
Dear Mr. President:
Objective
I am writing to inform you on the up-to-date state of the increase in tax that is to be put on small businesses in the country and give an explanation on the adoption of certain economic policies that impact on the same issue which conflict other policies that can be alternatives and also submit my opinion to those who make the policies on how they could have bettered the adopting the specific policies at hand.
Summary of the issue
As you know small businesses are a source of dynamic change in the American economy since they account for almost 52% of all people employed in the U.S. This means that more than half of the American population depends on this sector for their livelihoods and survival. So in relation to the issue at hand imagine what the repercussions will be when the new tax hike on small businesses is implemented sooner or rather than later on the owner’s small business owners and all those involved either directly or indirectly. Of the total profits made by small businesses two-thirds earned comes from households which cumulatively makes roughly $250,000 a year. This is from the same households that you are planning on raising taxes on. Although clams are that the tax raise will impact on a relatively small number, but that is irrelevant since after all the huge amount of profits is going to experience a tax hike. Furthermore this are the same profits earned from this sector that are going to be invested in our country and also create jobs for a lot of people.
Secondly, it is at household level that income tax is paid by small businesses. This means that your strategy on hiking the rates of tax is directly a tax raise on small businesses that include partnerships, sole proprietors, family farms, and S-corporations.
Third, the rate of tax on a large chunk of the incomes of small businesses can reach a 54.9% under your governance. This means that the Medicare/social security tax rate will rise to 15.3 percent from 2.9 percent while the personal top rate will rise to 39.6 percent from 35 percent. If you add the two together the result is a 54.9 percent.
Fourth, Mr. President this tax rate of 54.9 percent would in American history be the utmost highest from the administration led by former president Carter. This was a time in American history when people underwent through an inflation that was characterized by unemployment and a double-digit.so in essence do we really want to go back there since those were really hard times for the American people.
Fifth, the 26 million employers of small businesses provide paychecks to a total of 116 million Americans (Source: Census Bureau). When there is the threat of increasing small business taxes, his will create the risk of forced unemployment since millions of those employed and employers will be laid off due to unmanageable operating costs and also unreasonable profits gained that will not be able to make the business be self-reliant and independent.
Sixth, it is not the best informed decision on raising taxes on small businesses since net profits attained is derived from removing the net losses of the shareholders, sole proprietors, S-corporation, and partners. The IRS states that the two-third profits earned by small businesses is from households that contain adjusted gross income (AGI) greater than or equal to $200,000. Thus reducing the net profits will adversely affect negatively on people’s pockets. In order to understand the stand of the government on the issue of increasing taxes on small businesses we first have to get the reason behind adoption of this particular policy as opposed to others that may act as alternatives.
Economic analysis
Generate enough revenues
Taxing of small businesses which constitutes about 52 percent of the American population will definitely generate a high amount of income. This businesses mostly contain employers whose minimum wage is $200, 000 a year which is relatively very high compared to normal Americans who earn about $40,000 a year which is even less than half of what the prior one earns. Thus raising taxes on this bracket of people earning around $200,000 a year will surely generate high revenues for the country as compared to the other option of increasing taxes on large businesses that in fact are facing a rough time due to the harsh economic situation which is hitting them hard and acts as a barrier to them hence there is not economically ad financially they can do at the moment. Moreover there are over 1.2 million of the small businesses so if one does the math the amount of revenue collected as taxes is also a lot.
Reducing budget deficit
CBO projects that the increase in tax on small businesses will lead to an increase in GDP over the coming years. This under their projection forecasts that the deficit will go down to 4.0% of the GDP in the year 2013 and in 2014 to a 2.4%. They say that the deficit annually will be about 1 percent or less of the GDP. The reason is being the new taxes imposed on the small businesses plus other measures will reduce the amount of debts that the country owes to other countries like China for example.
Health insurance
The Medicare tax also increased and as a result a business that has around 50 employees or more who in a week work for least of all 30 hours have to be offered health insurance which has to meet a specific criteria. If the criteria is not met or there is a subsidy that is covered it is done so at a government insurance exchange. This is of advantage to the employees since their medical insurance is well sorted but to the small business owner if he does not meet the criteria he/she is subject to a big fine, plus one may be subtracted an amount equal to $60,000. Therefore the tax is beneficial to the employees but a problem to the employer or owner of the small business. These are all in the Affordable Act Law.
Balancing income inequality
Over the last couple of years income inequality has increased. The average household income from 1979-2007 among top 1% has grown by an additional 266% of which they accustomed to inflation. Over the same era the middle income average household distribution saw their pay rise by one-seventh as compared to their top 1 fellows. As the top benefited their rates of taxation continued to diminish and by 1990’s they were paying 35% of their pay as tax and by 2007 it came down to 28%. As we can see this is highly unfair since even the rich pay less as tax than the poor or middle classed. The increase in the small business tax that mostly aims the rich will therefore bring the balance in income equality by taxing the rich more and taxing the middle class and poor less.
Political analysis
According to budget experts, president Obama’s to upsurge taxes on top earners have only a small influence on the nation’s economy. However, this will only be a disaster to small business owners experiencing a tax hike. Tax increase will affect small business owners in different ways as discussed in the following paragraphs.
Tax increase will upsurge marginal income tax rates on small entrepreneurs, investors, and business owners. This will take the income away from these job creators that they could have invested to generate fresh jobs. Higher tax rates will diminish small business their incentives for taking new risks, which in addition will discourage job creation. If all of increase in tax rates hits, it will cause a terrible blow to jobs, but even permitting it to occur for incomes over $200,000 as suggested by president Obama, would have a severe impact on small business. A research demonstrated that president Obama’s tax increase would demolish more than 700,000 jobs. This is merely surprising as a tax increase will fall on the most successful small business that hires the most employees.
The proposed tax increase by the president will generate uncertainty amongst small businesses. There is no argument that tax increase is going to devastate jobs, but as troubling is the intensifying evidence that is decelerating job creation today. Investors and businesses do not understand what their tax rate would be in the coming years. Without this vital information, they cannot instrument the profitability of investments they are going to make. Until they understand what their taxes will be in the coming years and can establish the profitability of those prospective investments, they will delay. The job opportunities that these small businesses would generate are likewise placed on hold.
Tax increase will lower investment by small business owners. Tax increase will upsurge the tax rates on capital advances and dividends from 15% to $43.4%. These will then raise the cost to entrepreneurs and businesses of undertaking new investment to hunt for new potential opportunities. Higher cost of investment will lead entrepreneurs and small businesses owners to invest less, and thus slowing job creation.
Tax increase will imperil family-owned businesses. The increase of tax is going to increase the tax rate to 55% with just a $1 million exemption, up from its present 35% rate and $5 million exemption. The death tax is usually displayed as a tax that only rich beneficiaries pay. In reality, it hits the family-owned businesses hardest. Family-owned businesses are treasured on paper because they have many properties that they need to make and sell their goods. However, the businesses’ book treasures are not illustrative of the families’ liquid assets. When a family member dies, the entire families usually have to sell all or part of businesses to come up with the income to pay the death tax. This decelerates the expansion of these family-owned businesses and in some circumstances forces them to lay off existing employees. If president Obama and congress permit the death tax to increase, job creations will agonize as more families will have to sell off their businesses to pay the death tax bill.
In addition, Obama’s tax plan is going to fail to generate long-lasting jobs because it does not affect the key question businesses query themselves before hiring new workers; Does the new employee upsurge the business’s productivity over the long term? Businesses do not usually employ individuals for just a period of one year, so the credit is not going to modify their decision-making process at all. One other flaw is that the president and his alias are going to inevitably be offering tax breaks to small businesses, which already deliberate to add new payroll in the absence of the new tax credit. At best a contracting credit might upsurge temporary employees. However, even those jobs are going to disappear when the credits expires, leaving no standing effect on the job market.
Recommendations
First, an essential part of the proposed tax plan by the president should come from decreasing the value of various tax expenditures. Existing tax plan, most of these tax spending, such as those for mortgage interest, retirement, and charitable offering are upside-down i.e. they offer a bigger benefit to those in higher tax props which are both biased and inefficient. Y recommended that the president Obama proposal to address the upside-down problems while achieving substantial, enlightened revenue increases by converting itemized deduction into credits for small businesses. Expenses that are presently argued as itemized deductions would be transformed into nonrefundable tax credits equal to 18% of the small businesses value. This will offer the same tax benefit to small businesses owners in all tax brackets with middle income businesses benefiting from the modification.
Second, the Obama’s proposal should not propose to demolish deficits while reducing tax rates for small businesses even if below the already low levels in effect today. The proposal should use a large portion of the revenue gains from cutting tax expenditures to decrease income rates instead of decreasing the deficits amongst small businesses. This approach definitely, imposes much bigger cuts in tax expenditure than would otherwise be necessity on the order of $4 million or more over a period of ten years. As an outcome, these strategies hinge on president’s and congress’s willingness to accept on tax expenditure reduction that believe are political unrealistic, social undesirable, and economically amongst small businesses.
My conclusion Mr. President
References
Altmann, W., and John, P. (December 2012). Reforming Our Tax System, Reducing Our Deficit.
Associated Press (December 10, 2012). Obama tax plan no small deal for entrepreneurs.
Kavoussi B. (12/08/20120. Obama Tax Plan Cut-Off Closer To $300,000: Analysis
www.barackobama.com
Americans for tax reforms (2012). Five Things You Might Not Know About Obama’s Small Business Tax Hikes.
