Democracy Has Prevailed.

July 29, 2010

How The Trib Spins

In today's "Thursday Wrap" we find this:
As the Obama administration continues to insist only "the rich" will face tax increases, Americans for Tax Reform says a majority of the small-business sector will see higher taxes. Fifty-five percent of S corporations and partnerships will see a tax hike, it says. More "progress" from the "progressives."
But when you take a look at what they're actually quoting at the (Richard Mellon Scaife controlled foundations supported) Americans for Tax Reform, you'll see the whole holes in their argument.

Some definitions from ATR:
  • Unlike corporations, small businesses usually don’t pay their own taxes. Rather, business profits flow through to the business owner. The business owner pays taxes on her small business by adding the profits to her income tax form. Therefore, personal income taxes are the same thing as small business taxes.
  • According to the IRS, most small business profits pay taxes in households making more than $200,000 per year. The IRS keeps track of two types of small business income: sole proprietors, and “pass-through” entities like partnerships and S-corporations.
The so called S-Corporations. I was wondering about what those were. They're businesses where the profits are not paid by the corporation but paid to the owners who then treat those profits as income and that's where the taxes are paid. Got it.

Finally we have:
  • S-corporations and partnerships. There were 8 million partners and S-corporation shareholders in 2008. On net (profits reduced by losses), these owners reported business profits of $367 billion. Virtually all of this profit faced taxation in households making more than $200,000 per year. Aggregate pass-through entity profits will almost entirely fall in households making more than $200,000 per year. [Emphasis in original]
Looks to me like there's a bit of a sleight of hand going on at the Trib.

Looks to me like its profits from these S-Corporation small businesses that are income above $200,000 are taxed.

This according to Americans for Tax Reform.

Now go back and look at what the Trib wrote and ask yourselves these questions.
  • What exactly did they write?
  • What message did they send?
  • What message were they trying to send?
  • How does it jibe with ATR's details?
Once you do, you'll see the spin.


EdHeath said...

OK, I had a little trouble following the whole tax argument. Now, I possibly should be able to follow it, considering I prepare taxes on the side during the tax season, but where I work we only accept low income clients. So although I prepare some schedule C's (business income) for people payed (for example) by the YWCA as a subcontractor to watch kids (in other words, on a 1099misc), I almost never see anything about proceeds from an "S" corporation or partnerships.

But I looked around on the web, and I found some documentation on "S" corporations. Apparently in an "S" corporation, the operator of the business must be paid a wage (which he/she reports on federal/state/local income taxes), while profits are paid to the corporations shareholders (ostensible owners). This is supposed to allow for possibility of avoiding double taxation, since the creator/operator of the corporation does not have to also own stock.

I assume an "S" corporation would only choose to incorporate in this manner because the original "employees" thought that it would be producing something really valuable, and so it would be better to sell/issue stock to funnel what would be expected to be significant distributions to specific people (otherwise why bother incorporating as "S"). I can only assume that these are service firms with employees with considerable talent, or firms that produce specialized goods of high value. The people with stock in these firms are likely making over 200,000 a year, which is why they would be in line to be taxed more under the Bush tax cuts that Obama wants to let expire.

Most of what I said would go for partnerships as well. Roofing companies are not usually partnerships (I believe), but doctors' practices and law firms often are.

Blue Number 2 said...

Doesit seem curious that they talk of the amount of profits being subject to tax and not the number of business or individuals. Last time I checked business and individuals pay taxes not the profits themselves.

My point being that, using their numbers, the average sole proprietorship or S-Corp isn't making close to $200k or $250k in profit. Let's look at the numbers:

22 million sole proprietorships made $264 billion in profit. That's only $12k per business. Most of those businesses or individuals won't see higher taxes unless they've got another source of income.

8 million S-corps and partnerships made $367 billion. That's still only $45,875 per business or individual.

I think they chose their wording and analysis on purpose. Spin indeed!

Anonymous said...

Republicans tell us that letting the Bush tax cuts for those with AGI over $250,000 will be bad for the economy, largely because "it will hurt small business."

They'd like us to think that they are talking about "small businesses" like mom-and-pop operations, that won't be able to hire employees because money that could have gone to a busboy's wages will go to the IRS.

BUT, c'mon. The AGI here would be after all business expenses have been paid. To state the obvious, it would only affect small business owners with earnings before taxes of $250,000 or more. That is hardly the typical small business.

These are the very folks who have benefitted most from being citizens. Shouldn't they pay a little more in taxes?

(A note: S-corporations are limited in size and number of investors. They have the benefits of the corporate form in that they can own property and make contracts in their own corporate name, and their shareholders have limited liabilty, BUT, they are taxed like a partnership (Their income flows throw to the shareholders, who pay taxes on the income at their individual rates. Ed is correct. The object is to avoid double taxation. "S" comes from Sub-chapter S of the Tax Code.)

Mike said...
This comment has been removed by the author.
Conservative Mountaineer said...

@Ed.. Unless you're a CPA, an EA or otherwise qualified tax practioner, it's eople like you that should NOT be allowed to prepare or sign tax returns. I am a CPA, although I am not in public practice, and I STRONGLY support the current emphasis to weed out and non-qualified income tax preparers, including those who work for H&R Block. I do, however, keep quite current on tax law, especially S-Corp, Partnerships and C-Corps, all of which I deal with day-to-day in my business dealings. (I'm work with and am in several of each.. I'm an 'evil' Conservative capitalist. Proudly, I might add.) Please leave the discussion of tax law to the experts.

Conservative Mountaineer said...


No. We're talking about a MARGINAL increase of 39.6% on every dollar above $250,000 joint or $200,000 individual.. and that does not include taxes on employment earnings -PA (3.07%), local (1.0% or more) or Medicare (1.45%). Let's not get started on the stupid new 3.8% tax on 'investment earnings'.

It's the dollars over and above where the small business owner gets creamed.. all in the sake of 'fairness'. /puke. I call it extortion. To many people, near 50% now, pay NO INCOME TAXES. They are leaches.

Let me tell you what's happening. Successful people are NOT spending money. Upper management-types like me are NOT spending money. I can afford to sit back, live off what I make today and wait it out. Why should I try to make more? I might, but you can da*n guarantee I can structure any of my business ventures or deals to be allow minimization of taxs. In fact, I'm doing that right now for a RE deal as well as a new venture. In my business I advise people to MINIMIZE taxes. I follow the same philosphy.

Blue Number 2 said...

So CM, if a small business was so concerned about paying such a huge tax increase if they made over $250k in profit wouldn't they have incentive to hire someone or invest in some technology for the business to bring them under the $250k threshold? Sounds like a huge incentive to me to put people back to work and spur investment.

EdHeath said...

Funny, CM, as a tax preparer at an IRS free site, I actually work for the IRS. They provide training and yearly testing. Apparently they are satisfied with their own level of certification. But thank you for playing.

I assume you were actually saying that there should not be free IRS sites to provide services for low income taxpayers. Because once again you want to do whatever you can to make the lives of the poor more miserable. I assume that is your definition of "evil" capitalist, someone who works as hard as possible to transfer money away from the poorest 20% towards the richest 10%.

Also, we live in a Democracy. Which means your non-practicing CPA does not permit you to order me out of the conversation. After all, it was evil capitalists like Phil Gramm who wrote banking reform legislation that contributed to nearly putting us in another great depression. That sort of expertise needs to be at least balanced out by other sorts of expertise. And in a Democracy, it is. We all get to contribute to the conversation.

EdHeath said...

CM, isn't that a increase of the top tax bracket from 35% to 39.6%? So the phrase would be "MARGINAL increase to 39.6% on every dollar", not "MARGINAL increase of 39.6% on every dollar". You appear to be implying an additional 39.6% would be taken out in taxes, instead of just an additional 4.6%.

And isn't the top bracket $375,700 and up? Isn't that the bracket the 39.6% rate would apply to? Or isn't it important for "the experts" in this discussion to be precise?

Apparently not everyone agrees with you about the leeches. I suspect many of the people I have prepared taxes for over the years would gladly pay more in tax, if they could get higher paying work. One problem right now is that the rich are holding on to their money and not spending (I heard that somewhere). Because they want to provoke another recession. Because they hate America and want the terrorists to win or something.

Anonymous said...

cm, Could you explain how you arrived at "...a MARGINAL increase of 39.6% on every dollar above $250,000 joint or $200,000 individual[?]"

Mike said...

Ed, thank for the link. It was interesting to note who else didn't pay US taxes last year from the video: Exxon.

CM is correct that there is nothing wrong with structuring your finances to minimize taxes as Exxon does. However, Exxon shouldn't come to the US asking for handouts either. Maybe they should go to those offshore countries they paid taxes to instead.

Also, don't forget to thank Pat Toomey for helping to bring down the banking industry and almost causing a depression in addition to Phil Graham. He helped write the legislation on the House side, and would gladly do it again if given the chance.

My understanding is that the top tax bracket would increase from about 35% to 39%. That means to me that they would pay an extra $40 per $1000 earned. These are the rich, so an extra $4,000 on each additional $100,000 over what they are paying now would be more accurate.

Is there something wrong with my math?

Blue Number 2 said...

The bottom line is that it is a specious argument that an increase in the marginal tax rate of individuals is going to crush small businesses. Most small businesses don't make anywhere near the amount of money to qualify for the higher tax rates.

As for the rest I guess we need to have a discussion about who should pay for all of the spending that's been done over the last 10 years for 2 wars, huge tax cuts that benefitted the top earners more and huge domestic spending programs that were not offset by anything (note that this includes Medicare Part D and No Child Left Behind and NOT the Healthcare bill because it has been funded).

So CM, who should pay for that stuff? Should we raise taxes on your so called leeches? Will that solve our budget issues? Or do we ask the people who have benefitted the most from the tax policies over the last 10-15 years to kick back a little bit of their gains?

I guess we know your answer. It's all about you.

Unknown said...

The idea that most small businesses don't make anywhere near the $200,000 income mark is misguided. The key word is "income" not profit. My family has owned a dairy farm for many years, and we have had some pretty hard times even though we may have had more than $200,000 income the feed, equipment, etc. ate away almost all of that, and sometimes more than all. Most small businesses face the same problem they may earn alot of money in a year but only a small amount stays with them most of it goes to keeping the business on its feet. Thats where these taxes hurt small business.

Blue Number 2 said...

Mark, you are talking gross income. Gross income is never counted on personal income taxes. A small business owner who has business income will still be able to deduct costs to offset income. They wouldn't have to pay tax on the revenue with no reflection of operating costs like labor and materials. That would be ridiculous.

Conservative Mountaineer said...

@Ed.. I'm not going to try to answer or respond to your silly claim you 'work for the IRS'. I seriously doubt you get paid by the IRS. You state you 'prepare taxes on the side'. That is a moonlighter.

As for any others on here, I stand by my positions and I make no apologies, especially to those who say people with money are spending because 'they want another recession'. I call BS. People with money are leery of spending due to uncertainties with the inept Administration. No one knows whats coming and the Obama administration has shown quite clearly they are all too willing to trample on creditor's rights, ram legislation through without proper debate, threaten businesses publicly, and more.

How's that Hopey/Changey thingy working for you all? Has Obama paid your rent? Your mortgage? Your gas? Gotten you a job? Didn't think so.

One thing you liberals tend to forget is that Pelosi and Reid took control in 2006. That is when the sh*t starting hitting the fan.

Have a nice day.

EdHeath said...

Well, CM, regardless of the fact my work at the IRS free site is not my main job, that is something I do in the evenings and on Saturday during the tax season, I still have to pass their test to work there.

I notice you said nothing about your apparent distortion of the numbers, in terms of percentages and dollars. Why shouldn't we think you intended to mislead us, to create more concern than the numbers actually warrant?

Wasn't it in 2006 that Republicans in the Senate started setting records for filibusters? Maybe that's why wealthy people and companies are holding on to their money, because they don't know if critical legislation to help the economy will be held up by Republicans in the Senate. Maybe the wealthy are afraid the Republicans are so selfish and mean spirited that they would risk (again) causing another great depression, just to make the Democrats look bad (too).

No one expected Obama to pay our mortgage or rent or gas. I think we did hope more people would have jobs, but since Congressional Democrats had to bend over backwards to keep the stimulus from being filibustered to death, the stimulus was smaller than it needed to be. And now, in part because the wealthy and corporations are hoarding money, there is still a chance the economy will slip back into a serious recession or even depression, even as the Senate republicans keep blocking vital legislation.

Certainly there was no housing bubble from 2002 to 2006, no financial firms making toxic loans and mortgages, no financial regulators looking the other way. Of course, the same thing happened when there was that Republican administration in the 1920's. Still just as competent.