In the last few years there has been a general misconception on what wealthy really means. Politicians in America define it as anyone making $200,000 individually or $250,000 jointly with their spouse per year. Politicians in Canada seem to define it as anyone making more than $130,000 per year. These definitions have been justified all in the name of everyone paying their fair share. According to these same politicians, “Fair share” means that the “wealthy” need to pay more than everyone else. In logical terms, this is not the “fair share”, but instead the “lion’s share”. If someone making $50,000 per year paid 30% in tax and someone else making $250,000 per year paid 30%, wouldn’t they both be paying their fair share? Or another way of looking at it is that the person making $250,000 a year is paying more than their fair share because they are paying $60,000 more for the same services and freedoms. (250,000 x 30% = $75,000 and $50,000 x 30% = $15,000)
However, that was not enough for the supporters of “fair share”, because in the reality of our current tax system, the person making $250,000 is paying more than 30% and the person making $50,000 is paying less than 30%. Again, this is all for the same services and freedoms. Keeping that in mind, who would be our best hope for starting a business and creating innovations that help make a better way of life for all of us? Who is going to take the entrepreneurial risk to create a new business evolution to help protect us from a decade or two of economic malaise? It takes a lot of factors to get past the fear to start your own business and the person making $250K may be our best candidate. I say this because they usually have been in the business world for a while and they are also in a position to save enough money to actually start a business. This is not to say that someone making $40K a year can’t start a business but finances are usually the largest reason businesses don’t get started.
So what happens when you end up taking away more money from the “fair share” group in the form of federal, state, and municipal income taxes, surcharge taxes, AMT (Alternative Minimum Tax), sales tax, estate tax, and every additional tax we encounter on a daily basis? You end up with less of these people being in a position to start a new business and also hampering them if they actually do get it started. Politicians need to understand what a world without small business would look like. Let us not forget that small business employs about 70% of the workforce in the United States. It isn’t large corporations like formally bankrupt GM that we bailed out to the extreme that employ the majority of our workforce. It is the “fair share” group that is either directly or indirectly putting food on most of North America’s dinner tables. So with that in mind, by hurting small business you end up hurting around 70% of the “unfair share” group because it’s small business that is employing them. When the business owners get hurt, the response will be to employ less people. The unemployed don’t contribute any share and to make matters worse, the state will now be providing for them in the form of welfare and social services. Congratulations, you found the perfect formula to put a great chunk of the country on welfare with no possible hope of getting itself back to prosperity without decades of economic reconstruction.
To be clear, I have only been speaking about starting new businesses. What about all of the existing business owners that are already part of the “fair share” group? Well, the U.S. government is talking about not only raising their personal taxes, but also new healthcare surcharge taxes, as well as raising business taxes. Where is the incentive to start a business or continue to innovate and grow an existing business? It’s almost as if they are attempting to kill an already wounded economy. This was recently illustrated by the decision not to bail out CIT, which provides financing to thousands of small and mid-size businesses across the country.
Let us not also forget the message that this sends around the world. The word on the street is that global investors are nervous because they absolutely have no idea what the U.S. government is going to do next. Every day is another witch hunt with today being tax havens and tomorrow being the unknown. If you were an investor from another country and you witnessed the war not only on small business, but the financial and investment industry alike, would you invest your money in the U.S.? Unlikely, because as a foreign investor you’re not sure if there are going to be new rules coming out stating that the U.S. government will now be taking their “fair share” from you also. As an aside, the United States is the only country on the globe that levies taxes based on citizenship and not residency. That means that as a U.S. citizen, wherever you go in the world, you are beholden to file a U.S. tax return and pay U.S. taxes. This doesn’t really inspire Americans to go out and push American interests abroad in a world of globalization.
Waking up to the fact that small business is the large part of the cure for a U.S. economy in critical condition is imperative. We must start rewarding small business owners and stop hampering them from trying to innovate our country back to a position of prosperity. The bottom line is that, as a country, you want your workforce fully employed. The way the system works now is that each new employee straps the company with all types of costs that need to be paid to the government. This is why labor costs make up the majority of production costs in the U.S. and Canada, and promotes a mentality of employing as few people as possible.
So after all of this you may be saying, “Sure you hit all the points of what’s wrong, what’s the solution?” To start, what if we started giving net tax breaks for actually employing people? What if we gave corporations a net tax break on employing large amounts of people and small business an equal benefit? What if by doing this it helped incent people to start more businesses? In the end, the government would collect more tax money from the additional people employed than they would from the nickel and diming they inflict on businesses currently. They would collect all types of tax from these additional employees including federal, state, local, municipal, sales, property, etc. However, here is the real benefit. You’ll end up with more employees being in a position to create more productivity, and with this additional productivity, you’ll put companies in a position to allow employees time to innovate(Google is already doing this). Innovation makes us more competitive which keeps our industries healthy which creates and keeps jobs. Not to mention that you help prevent the full welfare state scenario we are currently sliding towards. In addition, remove the blinders on “fair share” because let us not forget that this is the United States of America. A country fought for and built by our forefathers in the hopes of escaping “unfair” taxation.
I think it would be wise in this culture of “fair share” to look at how deep or shallow the financial pockets of our “fair share” group are and their fortitude to continue producing under these restraints. Nothing in this world is infinite and if we’re not careful we may start the Great Unwind of what this country was founded on: innovation, evolution, and entrepreneurial spirit.
Copyright: Dominic Mazzone, Regent Global Funds 2009
This article was written by Dominic Mazzone, Managing Partner and Fund Manager of Regent Global Funds.
This article and other like it can be viewed at http://www.investingsymposium.com which is part of the Regent Global Funds Network.