What would you do with your business in this position? Why?
Published by admin on February 18, 2010If Obama wins today, it will essentially bring about the highest tax increase in American history. First, Bush’s tax cuts will be erased, and then Obama is going to raise taxes on those making over $200,000 to $250,000 annually, depending on which person associated with his campaign you talk to.
Every single time that this sort of tax policy has been pursued, businesses chose one of two possible options: capital reallocation or spending averse management. In every single model, both historically and theoretically, both models involved growth suspension.
So here’s the crux of my question…
Assume that you are a business owner making $400,000 a year. After paying payroll, payroll taxes, benefits, upkeep, loan repayments, and other business related costs, you still end up in the $250,000+ taxable bracket. You are reinvesting your money "in the market" (a.k.a. your business) for a solid profit.
After a change in political leadership, you find that the tax rate for your bracket is going to go up significantly. You accept that you’re going to have reduced income, no matter what you do. As the business owner, you do however have two options:
(a) Capital reallocation and growth suspension:
Instead of reinvesting as much of your net profits in your business, you move your liquid capital (cash) out of taxable instruments and move it into very modest return but tax sheltered instruments, locking the money out of the market for periods of 10 to 20 years. You still retain ownership of the net gains from your business, but it will be 10 to 20 years before you will be able to realize those gains. In order to make ends meet, you reduce your workforce and stop buying things from other companies unless it is absolutely necessary. This also means that, for the forseeable future, you will not be able to grow your company (no job creation). In the end, however, you keep more of your money, putting you in a stronger position to compete, because you end up having more capital after the market turns and there is a change in political climate.
(b) Spending averse management and growth suspension:
You continue to try to keep your liquid capital in high profit (but taxable) instruments. Since you are going to give up a high percentage of all your profits, you need to find a way to maximize your net profits by cutting spending. In order to make ends meet, you reduce your workforce and stop buying things from other companies unless it is absolutely necessary. This means you cut any employee that does not provide maximal tax benefit (this means all part time employees are terminated). You cancel your work place health plan, because you cannot afford it. This also means that, for the forseeable future, you will not be able to grow your company (no job creation). In the end, however, you give up more of your money, putting you in a weaker position to compete, because you end up having less capital when the market finally turns and there is a change in political climate.
Please note that in BOTH models the business owner (you) has less money to reinvest toward the business. In the first model, you put your money where you can’t touch it, but the government can’t take it away from you so your keep ownership of the money. In the second model, you keep your money where you can touch it, but the government takes a large chunk of it, so you end up having a lot less money after some theoretical future change in political leadership.
If you are a business owner, what do you do?
If you only see two options to any changes in the tax code, then you probably aren’t going to last as a business owner much longer, anyways.
I’ve never had just two options to anything, and I’m a SCHOOL BUS DRIVER. I don’t know where those guys who can only see two options to anything are supposed to work, but it probably isn’t in the big chair of a business making $40,000 a year.
BTW, your question is too long. People don’t like reading (or answering) long questions!