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| TAXES |
| Monday, April 11, 2005 |
| A young man who quit working "for the man" last year and started his own business has now discovered taxes - or, more accurately, marginal taxes.
He was flabbergasted when his accountant told him he owed $6,000 in taxes on what he considered modest income. His previous employer had withheld taxes from his income for the first part of the year. His wife's employer did the same for the full year, but he hadn't paid taxes on the income he earned in the last six months of the year. On that alone, he owes $6,000.
He is now getting over his marginal tax shock. And, he's in for a bigger shock when his business grows. Marginal taxes are the taxes you owe on the last dollar you make. The last dollar is not taxed at the same rate as the first, unless your taxable income never passes the first tax rate threshold.
In 2004, this particular young man and his wife (he's married, filing jointly) paid a federal income tax of 10% on the first $14,300 of their income. They paid 15% on the next $43,800.
After that, his marginal federal income tax rate is 25%, plus 7% state income tax and a self-employment tax of 15.3% -- a total of 47.3%. As his business grows, his marginal tax rate can grow to 50.3%, 55.3% or 57.3% under current federal and state law.
My young friend was unaware that once his income reaches a certain level, a level he doesn't consider "rich," the state and local government would be his business partner, taking nearly half of every next dollar he makes, but doing none of the work and assuming none of the risk. Needless to say, he's not too happy with this particular business arrangement. Neither are millions of other entrepreneurs. That's why some of them don't report all of their income.
The IRS has just published a study that finds people "underpaid" their taxes by about $300 billion in 2001. The IRS believes 80 percent of the underpayments are due to underreporting - people who don't report all of their income.
About a week before my young friend discovered marginal tax rates, he proudly proclaimed that he doesn't cheat on his taxes - he reports every penny, even though some people pay him in cash. After his discovery, he had a talk about taxes with his dad. He tells me his dad suggested he reconsider his decision to report all of his income. He says he's rejecting his father's advice and will continue to report all of his income, but he now has a much better understanding why many people make a different choice.
The reason is simple. The income tax burden on small business people is in fact oppressive and it turns many an honorable businessman and woman into criminals. It is a national disgrace.
Ralph Bristol |
posted by Jack Mercer @ 4/11/2005 10:28:00 AM   |
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| 2 Comments: |
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In 2002 I made 20 grand more than my boyfriend at the time. I paid like 11 grand or so more in taxes than he did. He got back $800 more than me. YES.
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Ephraim Kishon was a top Israeli humorous essayist in the 60s and 70s (and, who knows, may still now). I vividly remember one of his stories about a German professor, an immigrant to Israel, who didn't understand how the tax system worked. That is, he didn't understand that the tax rate was premised on the belief that all Israeli's would automatically halve their actual income when reporting revenue to the tax man. The good German professor reduced himself to abject poverty by reporting all of his income. The story had a happy ending, though -- he learned to lie.
Sounds as if our government is driving us in the direction of that satiric story. A low flat tax would be so much simpler, and so much better for the economy.
As a long-time self-employed, BTW, I enjoyed how lucidly you explained what we suffer. (And, I regret to say, I'm as honest as that German professor was at the start of the story, so I suffer lots.)
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In 2002 I made 20 grand more than my boyfriend at the time. I paid like 11 grand or so more in taxes than he did. He got back $800 more than me. YES.