Taxes and The Case of Paying More or Less

Over and over across every conceivable media outlet one headline is carried far more repeatedly than a Lindsey Lohan arrest. “Raising taxes on higher income earners.”

Personally I’ve grown tired of all I hear from far too many in the media and people in general. Most arguments have bordered on pathetic – and I believe I’m being charitable.

Most say (or think) they understand this issue, however it’s fairly obvious once they start speaking – they don’t. When one tries to engage the logic (or lack of) they get shouted down or brushed off. This discussion mirrors when parents and teenagers argue why or why not to be grounded. It’s all just emotions gone wild. Leaving most entrepreneurs unable to open their mouths as to defend wrongly placed assumptions or accusations.

The main reason? Most arguing are salaried employees of one stripe or another. Regardless of their levels of income or titles, most are unenlightened on the variable implications of taxes in business. Which for the entrepreneur is crystal clear.

This isn’t an argument for or against the raising or lowering of taxes. That is for you to decide. However the reasons and implications being bandied about today are ludicrous. And the cause and effects must be argued logically – not emotionally. They’re too important.

Taxes of any type force entrepreneurs to make decisions of consequence. More often than not immediacy is also dictated from what stays open – or what doors close. Whether to sell, buy, suspend, or worse – who stays, or who goes. It’s that simple. Period.

I may offend a few here, but it needs to be said:

If you’re a salaried individual working as an employee, regardless of how many degrees or alphabet soup used after your name. And you have never owned a legitimate business. Then I’m sorry to say far too many don’t know squat about taxes and their implications on business and entrepreneurs. Regardless if they earn a salary of $250K annually or more where this so-called “tax argument” is taking place.

Currently we hear political candidates and others express they themselves don’t mind paying a little extra to give others a break. Arguments on par with ” This tax increase would affect me, but I don’t mind paying a little more. Why should they?” It’s a specious claim at best, and is intended to make uninformed people believe they know what they’re talking about. They don’t.

First off one must understand a fundamental fact. A salaried employee making $250K does not experience a 1/2 of 1% increase of taxes (numbers are only for context) in the same manner as an entrepreneur or business that’s paying that salary. To the salaried individual it may seem an insignificant amount. To the entrepreneur it could be the equivalent of that employees entire salary – or more.

Let me demonstrate why the thinking or calculations are so different:

If an entrepreneur were to hire a person whom they would pay an annual salary of $250K. They would calculate that salaried person needs to produce in gross profit (not gross sales but profit) approximately 3 times their salary or more to warrant hiring them. Yes that’s correct, a gross profit of nearly $1 million dollars. That would translate at a 25% gross profit (this is for simple math) that individual would need to bring in $3 to $4 million dollars of total value.

Math breaks down somewhere along these lines.  One third goes to cover all the fixed overhead of the product (building-utilities-etc.) – One third goes to pay the employee as in salary – and finally one-third goes to the company’s bottom line.

Simplistic yes, but that’s how you break down complicated structures using “napkin math.” You think napkin math is for the undisciplined or rogue entrepreneur? Just ask Jack Welch. Billions of dollars of decisions and corporate markets were figured out on the backs of napkins as documented in books written on him. More should learn it.

So let’s take this basic math from an entrepreneurs viewpoint and directly apply it:

A business has sales of $40 Million annually. Economy hits the skids. Sales drop by 10%. That’s $4 million dollars in lost revenue. While coinciding with everyone arguing their taxes either should be, or will be raised. All this as a recovery in sales seems no where in sight. What can be done?

Answer: Increase productivity. How to do this with immediate results? Let go a salaried employee. Preferably one making $250K in annual salary that works in the affected department hit hardest by any slowdown within the company.

Using napkin math it adds up near perfectly. A 10% downdraft of revenue in a $40mm company equals $4mm. Let go just one of the employees that earns a salary of $250K and you have basically resolved that issue. Which is known as “increasing productivity.” By the way this is what many of those arguing for the increase are touting as a reason why taxes on business can or should be higher. (I guess they believe it’ll happen to someone else not them.) They’ll state “Business will adjust as to afford it through increased productivity.” Yes they will. Then cutting morphs into shuttering. Or just as insidious is jawboning a change in tax laws near daily with no clarity. You can induce stagnation, shuttering, layoffs, and more all in one swoop.

Here it is put a different way using a new car, however you can use anything you wish. Your 401K, real estate, furniture, what ever helps you understand.

You need a new car but it’s announced you’ll pay more in taxes next month if you wait. Then right before you buy you find the taxes are going to go down lower if you wait another 6 months. Then as you wait you hear the change has been cancelled.

Then you begin to hear negotiations are starting again, but the “experts” think it may pass lowering taxes more than originally thought. Only to hear weeks later the discussions have been halted and any signs of lowering are gone. Now talks are about raising even higher levies and they’re seen as inevitable. All this at the same time people are screaming and arguing everywhere that new cars should be banned and only used cars should be sold or made available.

Still buying that new car tomorrow? Welcome to the new world of the entrepreneur and business. Even worse if that entrepreneur or business sells cars. Let alone the employees of one.

Again make no mistake. I’m not saying one should or should not tax more – or less. What I am saying is the arguments and implications need to be based in real terms using logical examples based on factual data points.

This purely emotional form of debate currently taking place is nothing more than a debacle.

I’ll close my rant with this quote from one of my hero’s Andrew Carnegie from his book The Empire of Business 1902:

“The businessman pure and simple plunges into and tosses upon the waves of human affairs without a life-preserver in the shape of salary – He Risks All!” (emphasis is mine)

© 2012 Mark St.Cyr