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.
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