The controversy surrounding the GOP tax plan has brought up the time-honored scapegoat about how tax reducing plans benefit corporations at the expense of taxpayers. There is the general notion in the U.S. that tends to equate corporations as large gargantuan entities that can afford losses (theft) and pay taxes. A such, the GOP tax plan making its way through Congress now is generating controversy over how it supposedly benefits companies. But not all companies are the same. The fact is that the GOP tax plan offers no benefit to me, or to my family.
As for my family, we are in the 28% tax bracket and under the GOP plan, we drop down to 25%. With one child, we would not see any significant difference in the child deduction from the current plan versus the proposed GOP plan. But because “pass-through” businesses are being targeted, the proposed plan creates a new wrinkle to my tax equation.
I “own” three corporations, or companies. I wrote “own” in parenthesis because companies aren’t really “owned” under the legal definition. I control the companies and benefit from their revenues, but under the law, I’m just a caretaker for the company. Companies are independent entities that can be sued or can sue. Hence, for liability purposes, many business owners create corporations to insulate themselves from lawsuits. However, having corporations does not make someone wealthy. In my case, I have one C-corp and two LLCs, or limited liability companies. LLCs are corporations that are thought of as “pass-through” businesses. They were created to allow small business owners the insulation from lawsuits without the need to pay taxes twice. Let me explain.
My C-corp, El Paso News, Inc. owns this blog. It is a C-corp, which means I pay taxes on the revenues my blog generates, after expenses. Any money that El Paso News, Inc. pays me is handled like a normal paycheck most of you are accustomed to, although, I “own” the company. My El Paso News, Inc. paycheck has the standard deductions and withholdings as most paychecks including Social Security and Medicare (FICA) and federal income taxes. But because I am the sole shareholder, the paycheck the company writes me must come from funds it has already paid taxes on. In other words, my paycheck from El Paso News, Inc. has already paid federal income tax and I then must pay personal income taxes on that paycheck. It is double taxation for me as the same dollar pays taxes twice. Hence the LLC’s, which allows me to pay federal income tax only once.
But before we look deeper into the LLC, let’s continue with the El Paso News, Inc. example. In my case, the company pays 6.2% for social security and 1.45% for Medicare for a total of 7.65%. I pay the other 7.65% out of my paycheck. For most of you, you only feel the 7.65% pinch from your paycheck, but because El Paso News, Inc. is my company, I feel the pinch at 15.3% in addition to paying income tax twice on the same dollar I generate through El Paso News, Inc.
That gets us to the LLC companies. Most of my revenues are generated from my LLCs because I don’t want to pay double taxes on each dollar I generate. But, even then, I’m taxed more than most of you. The IRS treats the revenues I make through the LLCs as “self-employment” income and assesses me a “self-employment” tax. According to the IRS, “the amount subject to self-employment tax is 92.35%” of my earnings. For each dollar I generate through the company, I must pay 12.4% for social security and 2.9% for Medicare for a total of 15.3%. So, while most readers are paying 7.65% on their income for social security and Medicare, I’m paying 15.3%.
I make less than $250,000 annually so I’m exempt from paying additional Medicare taxes. The maximum taxable earnings for social security is $127,000 currently and sometimes I go over that amount but by little, therefore each year I’m liable for the full 12.4% of the first $127,000 I generate that year.
Keep in mind that in addition to the 15.3% I am also, like many of you, paying income taxes according to the bracket I land on. Since my income is less than $260,000 annually, my rate might go down by 3% under the proposed GOP plan. But, I must still pay the 15.3% when most of you pay only 7.65%.
But, because many assume that corporations are rich and because wealthy people can afford to game the system, the proposed GOP plan wants to create a new 25% tax for LLCs. In my case, it means nothing as I would pay 25% income tax regardless under the proposed GOP plan.
So, what is the bottom line?
Let’s look the scenario of $100,000 (after deductions) in income and what it means for most readers compared to me, a corporation-led revenue scheme. Under the GOP plan, most readers would pay $7,650 in social security and Medicare, plus $25,000 in income taxes. The total most readers would pay under the GOP plan in taxes on $100,000 is $32,650.
In my case, the same $100,000 in income would cost $15,300 for social security and Medicare plus the same $25,000 in income taxes for a total of $40,300. In other words, under the same income bracket as most readers, I pay an additional $7,650 in taxes by virtue that I work for myself.
Are there any options for me?
My only option is to get a job and draw a paycheck like most people. The GOP tax plan, like the current tax scheme, disincentives entrepreneurship. But more importantly, the notion that lowering the corporate rate is unfair or welfare for corporations misses the important fact that most small businesses in the United States are businesses like mine, where revenues are like most people.
Lowering the corporate tax rate from 35% down to 20% does nothing for most small businesses. It only helps the large corporations that already have the revenue resources to hire tax planners and lawyers to help reduce their tax burdens. However, like most of you, I make enough to be comfortable but not too much to be wealthy. My companies do not make me wealthy and the proposed GOP plan, including the proposed lower corporate tax does nothing for my bottom line.
As the discussion for the GOP tax plan continues, it is important to keep in mind that the corporations aren’t the problem. Many of them are in the same boat as most of you. The problem lies in a tax system that disincentives self-employed workers and encourages wealthy people to game the system in their favor. Simplifying the tax system to basic brackets without deductions and loopholes would go a long way to making the playing field even for all.
But there is a reason neither party wants to go down this road. Removing deductions and exemptions makes it difficult to game the system. Many of you are focused on the corporate tax rate and the homeowner’s deductions but you are missing the fact that a simple tax structure of percentages means that pretending the wealthy pay more in taxes or that corporations are overtaxed would be exposed as lies.
Consider this, let’s say that the tax rate is a flat 10% for everyone including social security and Medicare. If you make $100,000, you pay $10,000. Your wealthy neighbor makes $500,000, they pay $50,000. The company down the street makes $1 million, they pay $100,000.
Everyone pays the same percentage of what they make, including companies. But then, the tax preparer industry – an $11 billion industry – would go away. Jobs for tax lawyers would decrease substantially. The IRS would significantly reduce their payroll. Then, the government would be forced to be transparent in how it raises taxes. Instead of we’re raising this tax by 1% but giving you a deduction here or increasing your deduction there, the 1% tax increase would be readily calculated by the voters in seconds making the tax increase difficult for the government.
Hence, we’re back to square one, lowering tax rates here but adding deductions there. For us, middle class workers, whether corporate owners or workers, the sting each year remains the same, under the current system or under the proposed GOP plan. For most, the proposed GOP tax plan is a gimmick incentivizing the Apple’s and Ford’s of the world on the backs of the middle class.