Posts tagged with: Election 2008

Barack Obama Tax Increase

posted by   Ian Wyatt   |    November 5, 2008

Posted in   Financial Markets   |   Comments

 Yesterday Barack Obama won the election for U.S. President, and will become the first African American to lead our great country. It has been a remarkable campaign and election, and this historical outcome is something we will remember for the remainder of our lives.

I got some great feedback to my blog post from Monday titled "Why Barack Obama’s Tax Plan Hurts Small Businesses, Entrepreneurs, and the Economy." I've posted their emails to me as anonymous posts to the blog. Check out the comments section by clicking the title of that blog post, as my friends have some interesting thoughts and feedback. I'll take a moment in this post to respond to some of the key issues.

A couple comments focused on taxation of companies that file as S-corporations. At the end of the year, the net income from a S-corp that has not been invested during the year is considered income to the shareholders. This income flows directly to the taxable income of the owners. Whether the owners actually take this money from the company as an owner draw and move it into their personal accounts, or leave it in the corporation's accounts, the income is taxable as personal income at the individual's personal income tax rate. Therefore, even if the company earns income which the owner intends to retain in the company for investment in the next tax year, that income is taxed.

Few small business owners have the best interests of the economy and job growth at heart when making decisions. But all consider their own best interests. Growing a company and increasing its revenues and income is in the small business owner's best interest. Why? Because they earn more. But the consequence of a small company's growth is job creation and economic activity that benefits other companies. So regardless of whether or not we think the business owner earns more income with lower taxes has the best interest of the U.S. economy in mind when making decisions, he or she clearly does have his or her own best interests in mind. And those interests will guide the business owner to make intelligent decisions about their investment of capital to grow their business and increase their net worth (or to make other decisions about where their money is spent or capital invested). And even if they don't reinvest in their own business, but instead buy stocks, build an addition on their home, or spend that money on a new BMW, isn't that activity also stimulating the economy and / or generating tax revenue for Uncle Sam?

Some of the numbers I included in my original post were incorrect, and didn't include some of the tax breaks that Barack Obama has proposed for small businesses creating jobs. I think the more than the new president can do to give small businesses a break and stimulate the economy, the better off we will all be. But I don't believe that raising taxes on people earning greater than $250,000 will stimulate the economy, and historical evidence shows that it will in fact have a negative effect on growth and job creation, two things that I feel are necessary to help pull the U.S. economy out of the current downturn.

I agree that given the many mistakes of the Bush presidency, the U.S. government needs to increase tax revenues. Unfortunately, the U.S. taxpayer has to pickup the bill for the mistakes of the last eight years. I recognize that generally speaking, those people earning greater than $250,000 are better able to afford higher taxes. But at the core of my argument for not raising the highest marginal tax bracket is the fact that historically, decreasing the highest marginal tax rate (and tax rates across the board, for that matter), stimulates the economy and actually increases overall tax revenues. It will be interesting to see what Barack Obama does to to taxes in this country once he takes office in 2009.