I want to propose a hypothetical situation for serious, open-minded discussion. Let's say Tom has a dream of quitting his 9-5 job and opening a surf shop. He loves surfing and everything to do with it. His friends and family call him crazy, but he goes for it anyway. He takes out a second mortgage on his home, quits his job, and opens the shop. He starts small at first -- working the shop entirely by himself. But after a while, he starts making some money and building up a clientele. So he hires an employee...then another...then another. Soon he has five employees at his shop and is making a very nice profit. So he decides to open another shop. Let's say for argument's sake that that shop is also a success. Soon he has five employees working there, too. So he opens a third shop. Now he's really making money. He hires another five employees and starts to consider franchising his business model. What has Tom accomplished? Let's list them: - Tom has created 15 jobs for previously unemployed workers - Tom is renting storefront space from his landlords, increasing their profits - Tom's 15 employees are now paying income taxes, increasing government revenue - Tom is making much more money now than he did at his 9-5 job, thereby increasing government revenue - Tom is selling the goods of the makers of surfing gear, thereby increasing their profits and preserving the jobs of the workers at the surfing gear factory - The people in Tom's town are enjoying the latest, greatest surfing gear Now it's time to assess taxes on Tom. Assuming Tom pays his employees $12 an hour, should Tom be taxed... A) At a lower percentage than his employees? B) At the same percentage as his employees? C) At a higher percentage than his employees? Please choose A, B, or C and explain why.
B. Everyone should pay their fair share in taxes to support the amenities we have here in America. Complicating the system by sin taxing some more and welfare taxing some less is ridiculous.
I assume he's making more than 12 dollars per hour, so C, more. If he really needs that money to continue his entrepreneurial activities, he should pay himself as much as his employees (or less), and use that capital to reinvest in the business at which point that money would be tax deductable.
you haven't accounted for all variables so its dicey to give an answer. based on some assumptions given the norm in america I'd have to go with C though with some playing around with some of those base assumptions I could see b being a plausable outcome. A is just for the nuts who think the poor should subsadize the wealthy.
It depends upon certain things that the tax codes allow tom to do before he pays his taxes. There are laws that help Tom as an owner of his own business that others don't get who work for him. A few of those things are that he can lease a car to use and write it off as an expense and also write off the gas, insurances and upkeep as well. He can also write off any business vacations he takes and any expenses he incures that relate to his business that he himself can use but the others there cannot like his own insurance and lunchs, plane fare and dinners that "relate to his business.There are many tax exemtions that Tom the business owner gets along the way which his employees can't take advantage of and this is where Tom is really making allot more than what he actually pays taxes for.
This guy risked his house, probably worked his ass off the first few years, and now you expect him to pay himself less than the sclubs he has working for him? What, then, would be the incentive for anyone to do what this guy did? Work hard, take risks, and then make less money than the guy who just shows up and punches a clock? As to the OP question, he should pay more in absolute terms, but the same percent as everyone else (flat tax).
or something that in practice is regressive. a flat tax isn't fair because it pushes the tax burden away from those who most benefit on those who least benefit.
Well, now, wouldn't that remove Tom's incentive to shoulder the risk of starting the new business? Aren't the real incentives to starting a business (for most people, in general, anyway) a better living and working for yourself? If you take the better living away, why would Tom quit his 9-5 job and take out that second mortgage on his home? He could just keep his job and not shoulder any risk at all. In which case... - 15 potential jobs are lost - Three storefronts go unrented - The surf gear factory sells less of their goods - The government takes in less revenue because Tom doesn't increase his income and he never creates those 15 jobs Thoughts? You do realize that "writing a car off as an expense" doesn't mean you get a free car, right? You still have to pay for the car. Writing it off just means you have to pay a little less tax.
If he's doing fine and paying himself well, then he should pay higher taxes, what's the problem with that? He requires more than most a working road system, water, sewer, electric, and all the other hidden costs that sustain his business. I suspect someone in his situtation would: 1. Pay himself more than his workers and therefore pay higher taxes and 2. Set aside money from his profits for reinvestment One does not preclude the other.
But your answer was C, correct? Not only should he pay more taxes but he should pay a higher PERCENTAGE. Let's say I make $20,000 a year and Tom makes $100,000 through his surf shop. To make the math easy, let's say the tax rate is a flat 10% for everyone across the board. 10% of $20,000 = $2,000 10% of $100,000 = $10,000 So with option B, Tom is paying more in taxes to pay for the infrastructure (roads, bridges, etc.) he needs and uses. So why did you choose C and not B? Wouldn't B be a fairer choice for everyone?
But Tom doesn't use his own money to buy that leased car, he uses the businesses money and claims it as an expense just as his lunches, dinners and other things I mentioned. While the employees must use their own earnings to buy their cars which they can't claim on their taxes as a write off as Tom can do. That is a great advantage that Tom gets to me.
He will be paying the same rate up to a certain amount. Any money after that amount will be taxed at a higher rate, it's called a progressive tax. Yes, I believe in progressive taxation. If income is taxed but not business expenses, this might encourage the shop owner to reinvest in his business rather than pay himself more of the profit. It's his choice.
There is always the Business and Economics subforum where you could begin an honest thread about the pros and cons of a progressive taxation system.
A fundamental problem with the argument Aside from once again showing your contempt toward the labor force (unless you want to convince me the word "sclub" is a term of respect), there is a fundamental problem with your argument. For too long, labor has suffered the consequences of managerial behavior. From a business standpoint, if management wants good labor, a good wage is a must. Yet when it comes to business decisions, management always covers its own ass first. In terms of taxes, the problem with a flat tax is that the "equal percentage" does not have an equal effect. If you make $36,000 a year, and pay 10% in taxes, that $3,600 is a lot more relevant to your daily bread than $50,000 would to someone making a half-million dollars. And as to incentives, notice that the argument in the topic post is phrased in common terms we hear from various business-advocacy lobbies: creating jobs. Yet in defense of the entrepeneur, the question of incentive arises. To what degree is civic stability (e.g., the contribution of good jobs thereunto) an incentive in itself? And when it comes to the entrepeneur, what is the responsibility that goes along with the incentive? What about the responsibility of sound business practice? And here, whatever else we might think of Apple, it provides an historical lesson in business outlook. A few years ago, when the economy first started destabilizing under the weight of the subprime crisis, I found myself asking friends about the layoff outlook. Now, these aren't necessarily leftists. Indeed, most of them tended to vote Republican until Dole in '96 or Bush in '04. And without fail, we found ourselves in agreement. That is, What ever happened to the idea of having funds available to see a company through lean years? And here is where Apple becomes instructive. Theoretically, if Apple was run like any other company, the late '80s and early '90s should have killed it. But Apple had massive cash and investment reserves that saw it through those insanely difficult times before Steve returned, i-teched the world, and began the company's climb to surpass Microsoft earlier this year in market capitalization. So whatever we think of their insanely insane protectionism now, there is a lesson to be had in their earlier business outlook. Since the mid-'90s, at least (I use the Netscape launch as a starting point), cash on hand has been money that isn't doing anything; or, at least, it isn't doing enough. Capital is meant to be invested, and as long as the financial indexes point upward, this seems wise. But our economy has a habit of periodic collapse, and as we have seen from this latest financial crisis, management is unwilling to take a hit equal to the labor impact. Some company executives even took bonuses for running their enterprises into the ground. At twelve dollars an hour, and forty hours a week, Tom is paying out $24,480 gross to each of his employees. At fifteen employees, that would equal $367,200. At thirty percent, we're looking at just over $1.22m in gross profit for Tom's enterprise. From there, we ought to turn to an economist to calculate a theoretical net profit for Tom. It is much easier to answer the hypothetical proposition if we know what sums we are considering. Using IRS tax tables, if Tom is only pulling in $50,000— Please Register or Log in to view the hidden image! —he is paying: 4681.25 + (16000 x 0.25) = 4681.25 + 4000 = 8681.25 If Tom is making considerably more, say, $250,000, he is paying: 46833.50 + (40750 x 0.33) = 46833.50 + 13447.50 = 60281.00 Meanwhile, his employees are paying: 1675.00 + (7730 x 0.15) = 1675.00 + 1159.50 = 2834.50 Thus, after federal income taxes, Tom's employees are making $21,645.50. That might get you a 300 ft[sup]2[/sup] studio apartment in Seattle, where the standard is that one should make three times the projected annual rent (e.g., $600/month). But Seattle isn't much of a surfing town, so let's look at, say, San Pedro, California. Obviously, I picked the wrong one, because the lowest listing I found through Apartment Guide is $650/month, which gets you 343 ft[sup]2[/sup] in Long Beach. Tom, on the other hand, is making between $41,318.75—which gets him not quite $1,150/month for rent, so we can say an 850 ft[sup]2[/sup] one-bedroom apartment in Long Beach at $1,100/month—and $250,000, which would afford him over $6,900 for rent. At that point, he might even consider home ownership. To the other, though, I doubt he'll be pulling in a quarter-million from gross sales of $1.22m. Ultimately, however, we come down to a simple consideration: If Tom finds himself in a position where he is making less than his employees, just how is he running his business? After all, that doesn't sound like a good growth plan. So the question you ask becomes, "What would be the incentive for anyone to run their business this badly?" We can add in state taxes, of course, to complicate the illustration, but I would say that if Tom is expanding his business while making less money than the "sclub" who "just shows up and punches a clock", he's not running his business properly. Which is part of the reason the country is in an economic mess in the first place. (We might also note that if he's hiring "sclubs" to "show up and punch a clock", he's making another mistake right there.) At any rate, the big payoff will come with the franchise rights suggested in the topic post. ____________________ Notes: Internal Revenue Service. 2010 Form 1040-ES. 2010. IRS.gov. September 14, 2010. http://www.irs.gov/pub/irs-pdf/f1040es.pdf Apartment Guide. (n.d.) ApartmentGuide.com. September 14, 2010. http://www.apartmentguide.com/
Without considering the realistic evaluations provided by others above, and dealing only in the abstract and unrealistic description of the OP: If he is earning more money than his employees, by some significant amount, C, of course. He is using a higher percentage of the economic infrastructure, and profiting thereby at a higher rate - so he should pay a higher rate of tax. Because he wants to make a better living, which he is doing. How is that being taken away? He pays a percentage of the extra money he makes, he keeps the rest for his troubles. No. Tom is making use of a far higher percentage, not just absolute amount, of the investment established infrastructure available. Partial examples: he is making far more use of the education provided by the public to supply himself with useful employees and well-employed customers, not just his own capabilities. He is making far more use of the road system. He is making far more use of international treaties and financial policies and legal structures of ownership and investment. His employees are only benefiting from their own provisioning - he is benefiting from his own, his employees, his customers, his bankers and real estate professionals and police and fire departments in three cities and three counties and possibly three states. This expensive economic, legal, and social infrastructure multiplies his efforts enormously - like a pound of pressure put on a Bobcat lever instead of a shovel. The gain is not just one for one - he is getting twenty or thirty times as much production out of each one of his hours, compared with (say) his employees, or himself in a system without these advantages. Plus, all that was invested by others up front, so that he could use it when he needed it. It's now his turn to provide such opportunity for others. People in the past, the Toms of their time, provided it on the assumption that whoever made money off of it would pay for its upkeep and continuation. By using it, he profits from a social contract. If he wants a different social contract, he is welcome to seek his fortune elsewhere than this society. The Sudan, Uganda, some regions of the former Soviet Union, and so forth, might prove more congenial.
I'll be frank -- I find it hard to believe that people actually think this way and somehow find a way to rationalize it to themselves. It just defies common sense. Further, you're taking some of my quotes out of context. At least one of my replies was in response to Spidergoat and is out of context in your reply. Please don't do that. The employee is primarily responsible for his own education. That would be accounted for in a flat tax system. If the flat tax is 10%, if you make $20,000, you pay $2,000 into the system. If you make $100,000, you pay $10,000 into the system. You are therefore paying your "fair share" for your "extra" use of the roads (Tom driving to work every morning? I'm not real sure how running a surf shop causes Tom to use the roads more. If Tom were making deliveries, well, OK, but he's not. It's a retail shop.) A stretch, big time. With the flat tax he pays extra for the police and fire departments (although that's local, which is often financed through sales taxes). His employees get paid for their labor. His customers...huh? His bankers make money off his deposits. His real estate professionals make money off his rent. He paid for it all. No, I have to disagree. Tom owes nothing to anyone beyond what he agreed to compensate them going into whatever business arrangement. He owes each employee $12/hour, nothing more, nothing less, because that's what they agreed to. He owes his bank nothing but the fees they assess and the assumption that they can make money by lending his money to someone else. He owes the police, fire department, and city nothing because he pays taxes (again, sufficiently via a flat tax). In short, you have not justified why Tom should have to pay a higher percentage other than the old, "Well, he's got money. He can afford to pay extra" argument, which, in many cases, stems more from envy than anything else.
Tom can also set his own salary that he makes and use allot of his profits for investment income as well. Tom is in a very good position for he can show a loss and deduct from what he losses from his taxes but the employees cannot. Tom can use all sorts of his income for things he needs like clothes as example and deduct them as well.
I thought conservatives were in favor of lowering the deficit. We are never going to do that under a flat tax system. A progressive tax helps to reduce the undue influence of money on our government, particularly with respect to laws that govern business practices. It reduces income inequality and encourages investment in the business itself rather than personal wealth.
Spidergoat, no offense, but I'm completely opposed to this line of thinking. I do not believe there should be any effort to "reduce income inequality." You should be allowed to keep whatever you make, regardless of how much it is. Bill Gates and Rupert Murdoch should be allowed to keep their billions if they want to. It's not my money. It's theirs. Progressive taxation does not encourage investment in business because it's, well, taxation! I can't invest it if the government takes it away from me!
