The one underlying agreement by both Austrian and Keynesian economists is that you don’t raise taxes in a recession or slow-growth environment. The United States faces a massive tax increases coming on January 1, 2013 along with continued deficit spending for years on end, which will lead to a massive economic collapse.
Small businesses have been the catalyst of job growth here in the United States, but that catalyst is now in great jeopardy because of the pending tax increases. Let me give an illustration that hopefully will drive home my point. “You have a small business that is incorporated. Currently, this business pays a corporate rate at the margin of 35%. You company makes a profit before taxes of $100. Given the marginal rate of 35%, your company pays Uncle Sam $35. This leaves the company, you, with an after tax profit of $65. Since you own the business, you give yourself a dividend of $65. However, this amount is currently taxed at 15%. So, at the end of the day, you have $55.75 to keep for yourself after paying out to Uncle Sam $44.75, or an effective tax rate of 44.75%, which does not include any state income taxes by the way. For 2013, the administration is proposing that the corporate tax be reduced to 28%, which is at least in the right direction, and increase the dividend tax rate to 43.4%, which is definitely not good news to small businesses. The consequences of these pending rate changes will be for you to keep $40.75 and pay out to Uncle Sam $59.25, or an effective tax rate of 59.25%.” Ouch, that will definitely hurt!
Bottom line is that for the small business owner his/her tax rate will effectively go from 44.75% to 59.25%. In other words, you take all the risk as the business owner and get to keep only $40.75 from every $100 that you, not the government, generate.
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