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What's New

2011-10-24 12:20:57

“Anti-Capitalist” movement…really?

Q: What’s new?

A: The last time someone asked me that, it took the past eight issues to answer the question (smile). This time it won’t take so many. The other day I was watching a young, female co-anchor, teamed with a more senior male anchor on CBS, grilling…in a most disrespectful manner in my opinion…Steve Forbes on what has been coined by President Obama as the “Buffet Tax.” She couldn’t understand personal income tax as it related to capital gains tax. Finally, the more senior anchor shut her down and took over the interview. It was amazing to me how this young co-anchor could be so unknowledgeable of her subject when she was questioning a person of Steve Forbes business savvy and experience. Don’t get me wrong. I don’t think he or anyone else is the greatest business guru God ever created. It’s just that he is “miles” ahead of her understanding of business issues, and it was not being respected. You see, it wasn’t like she just was giving a news story. He was in the studio! She knew he would be in the studio. How could she not be prepared, even if she knew nothing about it beforehand? After a while, I had enough and began to pan channels as I usually do…and came across MSNBC. I caught a forum of five people basically knocking business in general and chiming in together how the government needs to control and regulate business even more in order to assure prosperity for all. I then panned over to another channel and they were showing what has become known as the “Occupy Wall Street” movement, or “Anti-Capitalist” movement. I thought, “What is this world coming to?” After shaking my head enough to begin hearing what few brains I have rattle, I thought to myself again, “You know, I have heard comments and protests from all kinds of folks on taxes, business and jobs for several months, and many of their comments are similar. It’s not that I have a problem with these people making these comments and protests…and neither should anyone…as the right to free speech is guaranteed each of us in the Constitution I so adamantly support. It’s just that in the present climate of our country needing so much help on so many fronts in such a short time, people need to be knowledgeable of their subject before they begin commenting and protesting. I for one don’t think that is too much to ask. Why do we need all of the ‘clutter’ that is created by those trying to confuse things? Lay out the facts…let’s solve the problems.” It’s about now that I thought, “My next article has to be something that almost anyone can understand, in an attempt to educate as many as I can about these subjects. Maybe getting everyone ‘on the same page’ will help us solve some problems we are all facing by getting credible input, instead of all of the ‘clutter’ we’ve been getting.” As I was preparing to write this article, I thought, if all I did was talk about our current 61,845 page tax code; or bad mouth those who are expressing their selves; or repeat the same endless rhetoric that you hear from the “right” and the “left” as they state their different positions on things…it would be very boring and the same old stuff you’ve heard so much of recently. So instead, I have chosen to tell you a story…a fictitious story…but one that has happened hundreds of thousands of times over the years in this and every other state in the country. It may still be boring, but it will certainly be easier to follow and understand…if you happen to be one who will take the time and wants to understand it. John, age 48, and Mary, age 46, are married and live in Wichita. John has worked for 24 years as an engineer for a local manufacturing plant. Mary had a position for six years as a buyer/merchandiser/manager for a woman’s clothing retailer when she was just out of college, but for the past 18 years she has been a stay-at-home Mom. One of Mary’s many other talents is baking…and more in particular…baking pies. Her recipes for her crust and her different types of pie filling are most unique and have resulted in Mary winning all types of prizes and awards. In early 2009, now with the kids in college or headed to college, and after years of planning and discussion, John and Mary decided to start a company to produce pies. They established a sub chapter “S” corporation called J & M Enterprises, Inc. (“J & M”), a Kansas Corporation located in Sedgwick County. J & M began their company with their Articles of Incorporation with a total of 100,000 shares of stock when it was established, but only 100 shares of stock were issued (50 shares to John and 50 shares to Mary), or in other words…each owned 50% of the company, with 99,900 shares of unissued, treasury stock in J & M. The board of directors consisted of John and Mary, each with one vote. A sub chapter “S” corporation pays no taxes, but rather its earnings pass through directly to the stockholders in the form of distributions, based upon each stockholder’s percent of ownership, and the stockholders pay taxes on these distributions as ordinary income…the same type of income that they would have as a salary working for any company. J & M decided to lease a building from John’s uncle Larry, age 78, rather than buy and existing building or build a new one. They obtained a 5 year, triple net lease (one where J & M would pay the maintenance, insurance and Property Tax) from Larry on the building, in favor of a most competitive lease payment and leasing terms. As they began operations, Larry became excited about the business possibilities, and since J & M needed additional operating capital to begin the business, Larry invested $100,000.00 in the company, in return for 50 shares of stock. John and Mary, the only board members, voted to issue these 50 shares and these were sold to Larry for his $100,000.00. Now the ownership of J & M stood at John, Mary and Larry each owning 1/3 of the company, with 99,850 shares of unissued, treasury stock. Larry also received a seat on the board. He had one vote, making now for a total of three, equal votes. J & M’s accounting was set up as cash-based, as opposed to accrual-based accounting, with a fiscal year end of December 31st. All this means is that all income and expenses were set up on actual cash paid out and actual cash received for each calendar year, rather than on accounts receivables and open invoices. They began operations in April of 2009. The equipment they purchased amounted to $74,000.00, not counting two delivery vehicles that were purchased. Rather than capitalize this equipment and depreciate it over several years, they expensed it all in 2009, which they could under Section 179 of the Internal Revenue Service Code. John used his many talents and skills in the engineering area in laying out the building, and perfecting the production flow and process. Mary used her talents and skills in buying, marketing and management in setting up the “operational bluebook,” or what could also be called, their method of operation. Once production was up and running, the first thing Mary did was call on restaurants and pie retailers. She, along with two other employees, brought in samples of J & M’s pies. The owners/managers/buyers of the restaurants and the pie retailers loved them. J & M had a kickoff promotion where they gave each restaurant and pie retailer their first 25 pies FREE, if they would use these pies for sampling to their customers. They did and J & M became very successful. Even after expensing the equipment in their first year, J & M made $23,452.00 in net income in 2009, but in their first full year of operations in 2010, they had gross sales of $1,248,000.00, which generated $1,782,857.00 worth of retail sales, with all sales made in Sedgwick County, and net income (profit after all expenses were deducted from gross sales) of $225,000.00. At the end of 2010, there were 8 full time employees (counting John and Mary) and 2 part time employees. For the purposes of explaining the different taxes that were paid and how a business operates, let me analyze this first full year of operations for 2010. John and Mary each took a monthly salary of $2,500.00. J & M withheld Federal Income Tax on this amount and paid it to the IRS on a monthly basis, using the online EFTPS system. Larry as an investor took no salary. J & M also withheld the Medicare Employee Portion and put it together with the Medicare Company Portion that amounts to 1.45% of wages for each; and the Social Security Employee Portion and the Social Security Company Portion that amounts to 6.2% of wages for each and paid it to the IRS with the Federal Income Tax payment on a monthly basis, again using the online EFTPS system. For illustration purposes, I am not counting the 4.2% paid by the employee under the current temporary rule. Since J & M’s sales were to entities that resold their pies, J & M paid no Kansas Sales Tax. The Kansas Sales Tax was collected and paid by the entities that bought J & M’s pies for resale, who charged and collected the tax from the consumers of the pies. This amounted to $130,148.56. This amount of Kansas Sales Tax was paid to the Kansas Department of Revenue by the restaurants and pie retailers. The J & M board voted to make a distribution to each stockholder at the end of 2010 of $50,000.00. Although all of the money each stockholder received from J & M was only $50,000.00, because all earnings pass through to the stockholders individually whether they are distributed or not, John and Mary paid Federal Income Taxes for 2010 on earned income of $60,000.00 from their salaries; plus their 2/3rds of the net income of J & M, which was $150,000.00; less their deductions which amounted to $35,670.00; finally resulting in a taxable income of $174,330.00. This Federal Income Tax was paid by John and Mary at the Married and Filed Jointly Rate of 28%, for a total of $48,812.40. An amount of $1,860.00 in Social Security Employee & Company Portion was paid in by J & M for each John and Mary, and a lesser amount paid in for each of their 6 employees; and $435.00 in Medicare Employee & Company Portion was paid in by J & M for each John and Mary, with a lesser amount paid in for each of their 6 employees. Larry is in the top bracket. He paid 35% of his share of the earnings from J & M, or $26,250.00 in Federal Income Tax, in addition to the other Federal Income Tax he paid from his other interests and endeavors. So, in addition to J & M contributing $1,782,857.00 to the Gross Domestic Product (GDP) of the country through the retail sales of its products, and the creation of 8 jobs, let’s take a look at what this one small business did insofar as making contributions to the different tax coffers of government. Remember, this is only from J & M, their customers and their employees, and only for the year 2010. Federal Income Tax John & Mary $48,812.40 Larry $26,250.00 6 Other Employees, approx. $3,500.00 each, for a total of $21,000.00 Total $96,062.40 Medicare & Social Security Company & Employee Portion John $2,295.00 Mary $2,295.00 6 Other Employees, approx. $1,750.00 average each, for a total of $10,500.00 Total $15,090.00 Kansas Sales Tax Kansas State Sales Tax collected and paid by J & M’s customers, on J & M Products Sold, of $130,148.56 Total $130,148.56 Sedgwick County Property Tax Building $5,670.00 Delivery Vehicles $678.00 Total $6,348.00 Kansas State Income Tax 3.5% of all wages paid for the year, less $2,250.00 per person allowance, for all employees of the company Total $10,023.10 Kansas State Unemployment (Employer pays approximately 5-7% of first $8,000 of wages on each employee, employee pays nothing) Total $3,200.00 Not bad for an idea, huh? Over $260,000.00 paid in one year…to the above tax coffers…with more than $111,000 of this amount going into the Federal coffers. This does not count other taxes that were paid such as gasoline tax on gas used by the delivery vehicles, title and registration taxes, business license taxes, etc. A total of 8 jobs were created. Thus far in 2011, they are running at 23.1% ahead of sales and 26.2% ahead of net income as compared to 2010. They have added two more employees. This will put just shy of $320,000.00 in all of these tax coffers for this year alone. Please note, this does not count the “second and subsequent” rounds of taxes generated and paid by all of these people spending the money they earn back in the economy…and the places where they spend their money spending their money…or the many different places that J & M spends their money, and on the products they buy to build their pies…or the businesses where they buy the products they buy to build their pies spend their money…and where these places’ employees spend their money…or the businesses that retail the pies and where these businesses’ employees spend their money… I love business…and how it works…don’t you? Long Term Capital Gains Just recently, a buyer surfaced and offered to buy J & M. A conservative multiplier for determining value of such an entity is 3-4 times net income. Projected net income for 2011 is $283,950.00. The board elected to sell for 3 times net income. The selling price was $851,850.00. There is now a Long Term Capital Gains Tax due from each of the owners to the Federal Government. This amounts to 15% of the selling price, minus the amount paid for the investment, plus earnings, minus distributions. This is the only long-term investment asset John, Mary and Larry sold in this calendar year. Each will pay an approximate amount of $45,000.00 each. Total $135,000.00 Federal Estate Tax Just two months after the sale closed, Larry died unexpectedly. He was a bachelor all his life. His net taxable estate, after all deductions and credits was valued at $12.5 million. His estate will pay $2,625,000.00 to the Federal Government as Federal Estate Tax under the current law. If the current law expires and the old rates go back into effect, his estate would pay more than $4 million to the Federal Government as Federal Estate Tax. Total $2,625,000.00 This is just one small business…and what it did! How can anyone not appreciate this? While I am here, let me also address another comment you have heard and will continue to hear from President Obama, people in the “Anti-Capitalist” or “Occupy Wall Street” movement, and people like the one the young, female anchor who was trying to pin Steve Forbes… “Warren Buffet pays a lower tax rate than his secretary.” In all fairness to the exact wording of this comment, it is true. Mr. Buffet does pay a lower tax rate if you compare the 15% Capital Gains Tax with the Federal Income Tax, but it is not true if you compare his Federal Income Tax rate to her Federal Income Tax rate. It is like saying two pieces of fruit are the same, even though one is an apple and the other is an orange. Yes, they’re both pieces of fruit, just as two taxes are both taxes, but they are different. Why is it that some people cannot tell things the way they are? When will they stop trying to confuse us poor, ol’, dumb, country bumpkins? Another example…over the past few weeks, President Obama went around the country on the America Jobs Bill saying, “If this bill is passed, it will put an additional $1,400.00 in the pockets of every family in America.” Who can argue with this not being a good deal? But what he didn’t tell us about are the 567 rules and regulations that are part of this bill that will hamper business and hurt other groups of people, resulting in a reduction of jobs being created, more government involvement in our lives and more bureaucracy…and the cost of $500 Billion to go with our almost $15 Trillion debt. Obamacare was handled in the same manner, only instead of 567 rules and regulations, there were more than 5,000! Do you get as tired as I do, of being treated like an idiot? You see, Warren Buffet’s income comes from at least three sources. The first is his salary. Over the years, he has taken an annual salary from companies that he owns for as little as $1 to much more. If he took the same salary as his secretary, he would pay the exact same Federal Income Tax rate on that salary as does she. This is comparing an “apple” with an “apple.” The second source of his income is from dividends and distributions from the companies he owns, co-owns or from the stock he owns in these companies. These of course are for the most part…huge for Mr. Buffet, and the ordinary dividends are treated as ordinary income, along with his salary under the first source of his income. If they are qualified dividends (too long of an explanation for this article), they are treated under his third source of income, which is capital gains. Capital gains come about from the sale of an investment (i.e. stock, mutual funds, property, precious metals, a business, etc.). If the individual owned what he/she sold for less than one year before he/she sold it, it would be a short-term capital gain. If the individual owned what he/she sold for longer than one year before he/she sold it, it would be a long-term capital gain. Short-term capital gains are treated as ordinary income…his second source of income. Taxes on long-term capital gains are based upon which ordinary income bracket you fall under. You pay nothing on long-term capital gains if your ordinary income bracket is 10-15%. If you are in the 25% or higher bracket, you are taxed (for the most part) at 15% of the selling price, minus the amount paid for the investment, plus earnings, minus distributions. At the end of the year, if all you had were short term capital gains and losses, you would take the short-term capital gains, minus the short-term capital losses, and pay on the difference as ordinary income. If you ended up with a net loss, and you have a long-term capital gain, you can deduct the short-term capital loss net from the long-term capital loss gain and pay 15% of the difference. You can write off the balance (if any) of your short term capital gain at the rate of $3,000 per year. Getting confused? This is not even the “tip of the iceberg.” This is all a small part of our 61,845 page current tax code…and beginning soon…there will be many more pages…some few know anything about…with additional taxes that will be assessed, changed, added, modified and increased as Obamacare and many more regulations continue to unfold. All of this is the biggest reason why I am such a big advocate of the FairTax (see September ’11 issue). Were it to be in effect, it would have brought in more than $400,000.00 to the Federal Tax coffers for 2010 from J & M instead of $111,000, not counting what would have been brought into the state coffers…AND…there would be no Federal Income Tax paid by anyone, nor would there be any Medicare Tax from J & M or the employees paid, no Social Security Tax from J & M or the employees paid, no Short or Long Term Capital Gains paid and no Federal Estate Taxes paid. The FairTax would have brought in 360% more revenue to the Federal Government than our present tax system did from J & M! If you love how this one small business created jobs and contributed taxes to all these tax coffers under our present tax code from the example above…imagine what it would have been under the FairTax? This is the kind of revenue we need to solve our problems. This is the kind of revenue we need to take of all of those that need to be taken care of; to defend us; to keep us ahead of the world; to balance our budget; to pay off our debt; and to allow us to return the good ol’ days that we all thought were gone for good. As I stated earlier, J & M is a fictitious company and this is a fictitious story, but one that happens thousands of times in this and every other state in the country. This is America. This is capitalism. This is what built our country. Someone tell me what is wrong with this? What is this “Anti-Capitalist,” class warfare movement we have been seeing from some of our leaders…the President included…and from demonstrations in New York and other larger cities around America? Who, in their right mind, cannot appreciate the role of small business in America? What really is it that they want? America is also based upon collective input and has been for nearly 250 years. I want to hear what others have to say, but I don’t want “smoke” and distortions of the truth. Lay out the facts…let’s solve the problems. Once understood, why would the government or any advocate group want to do anything to impede J & M, or any business, with increased tax burdens and regulations, and the lack of respect shown by so many who don’t understand how business works and how jobs are created? Wouldn’t we…as a society…welcome 100,000 such businesses…or a million? Rather, it’s been, “Let’s eat small business…the rich…and while we’re at it…let’s eat anyone who has anything at all.” But there has been no thought of what to do after the “meal.” Small businesses will forever be the backbone of our economy. Government doesn’t create jobs. It does not affect the GDP of our country. People in government are supposed to take the tax revenues shown above, and administer them. How do we get back to a government of the people, by the people and for the people? Isn’t it time for government to stand back and get out of the way? Our Founding Fathers knew we needed some government…and they were right…but we don’t need more than it takes. When the day comes that there are no more J & Ms starting up, flourishing and creating jobs…in my opinion…you can color this country gone. Anyway…that’s what I think.