Wednesday, November 14, 2012

$250,000 Millionaires

Guest Editorial by Dr. James Beierlein

In this year's presidential campaign, there was a great deal of talk about taxing the rich guys - the so called $250,000 millionaires.  As is normally the case, there is more to this statement. Let's look at this a little deeper.

The U.S. has the highest corporate tax rate (Federal rate of 35 percent) in the world. Most of the major economic powers have a corporate tax rate in the range of 20-25 percent, with some places like Ireland having a rate of 11 percent.  It is easy to see why our corporations look to locate overseas.

Source: CNN Money
Tax rates have an impact on the legal structure that firms adopt.  This is why many small businesses operate as small business corporations (often called Sub-chapter C firms).  By doing this, they gain all the benefits of being a corporation, such as limited liability for the owners and having things like health care be a tax deductible expense.  Also, the owners can elect to have the profits from these firms taxed at lower personal income tax rates rather than the corporate rate (35%).

Small businesses generate around 70 percent of all the new jobs in economy and, usually, are the birthplace for most innovations.  These firms are the winners and the ones that kept us competitive.  With an average profit rate (5 percent), a firm would need sales of just $5 million to reach this $250,000 threshold. Keeping a heavy tax burden on these employment generators does not make economic sense, especially during an economic slump.  But, I was always taught that being a millionaire started with a million dollars, not $250,000.

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