This Day On The Street
Continue to site right-arrow
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Tax Fairness and the Small Business Owner

NEW YORK ( TheStreet) -- While the middle class has been getting "crushed" over the past four years, there's another class that has been in the crucible, too: The high-income small business owner.

The chart below, which is a simplified, but accurate picture of members from each group, tells the story pretty well in my view. In addition, the chart also offers some surprising insights on how you should be investing depending on which group you reside in.

On the left side of the chart is a local small business owner. On the right hand is a hard-working city employee.

From a tax standpoint, I feel the above two scenarios close the book on so-called tax fairness. Specifically, the small business owner makes nearly eight and a half times what the city worker makes. However, note the small business owner pays 60 times -- that's 60 -- what the city worker pays in tax.

But it doesn't end there.

The city worker, because of his lower wage rate, gains greater access to financial aid for his children's college education. The entrepreneur, on the other hand, might be able to access subsidized loans.

The city worker gets health insurance coverage for his family, and in some cases 100% of his premium paid. The entrepreneur foots 100% of the bill for his own insurance, and some of the bill for his workers. The premium payments he makes represent foregone income for the entrepreneur.

The city worker gets paid time off, sick days and in several situations, a protected leave of absence. Theoretically, the entrepreneur gets none of these benefits and actually pays for others' vacations and sick days, resulting in foregone income.

The city pays a share of the worker's contribution to Social Security and Medicare, approximately 7.6%. The entrepreneur pays 13.3% for Social Security and Medicare on the first $110,100 of his income. He also makes matches his workers contribution to Social Security, reducing his profits.

Finally, the city worker receives a pension of $49,000 annually, starting at age 59, guaranteed by the taxpayer. The present value of the pension is approximately $1.6 million -- using a discount rate based on 30-year Treasury Bond. The business owner gets nothing. He can sell his business, if it's salable, and perhaps earn a windfall. But unlike the city worker, there are no guarantees. If he did sell the business he would have to fetch $1.6 million after taxes and paying off all debts to come out ahead of the city worker.

1 of 2

Select the service that is right for you!

Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!


DOW 17,804.80 +26.65 0.15%
S&P 500 2,070.65 +9.42 0.46%
NASDAQ 4,765.38 +16.9840 0.36%

Brokerage Partners

Rates from

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs