One of the most annoying things that I’ve been reading is the in-the-press debate over whether the Obama administration should extend Bush-era tax cuts. Specifically, it rubs me the wrong way that the group least likely to have their tax cuts extended is referred to in the media as “the richest 2 percent of American households,” “the wealthy,” “the highest earners,” and “the wealthiest” as was done in this story in today’s Pittsburgh Post-Gazette.
The use of these words makes it seem like the Donald Trumps and the Bill Gates of the world aren’t paying their fair share. But the fact of the matter is that this “2 percent” isn’t comprised mainly of these celebrity types. It is comprised heavily by business owners, including the owners of many of your suppliers.
You see, this “top income bracket” begins with individuals who make more than $200,000 per year or families that make more than $250,000 per year. Sure, that sounds like a lot of money for a person or couple to make, but consider this: in the US tax code, any business that is organized as a “Subchapter S Corporation” has its profits taxed as individual taxes on the owner’s tax return. So, if some of your suppliers are Subchapter S Corporations and their profits exceed $200,000 – not too hard for a mid-sized company, right? – then the owners (i.e., the businesses) will see their taxes go up if the Bush-era tax cuts aren’t extended.
Another thing to keep in mind is this: the profits are taxed irrespective of whether the business plans to reinvest those profits in the business in the coming year. So, let’s say that a business’ income statement shows a profit of $300,000 on December 31, 2010. Even if that business wants to use that money to hire a few employees on January 1, 2011, too bad. The government will tax that profit and leave the business with close to half of what it started with after the federal government, the state government, and the local government get their fingers into the pie.
The talk of government not only maintaining but raising taxes on business owners isn’t real conducive to driving down the unemployment rate – which incidentally was reported today to have risen to 9.8% – is it?
What does this mean to a procurement professional?
It means that, if taxes are raised for “the wealthy,” your suppliers are going to get to keep a smaller percentage of the revenue they bring in. For you, that might mean that suppliers will attempt to raise your prices because they are going to need higher revenue to maintain the same after-tax profit or it might mean that they will try to cut corners so that same revenue – lower costs + higher taxes = same profit.
And what does this mean to the competitiveness of American businesses in the global economy? It means that other countries’ suppliers will be more attractive.
Any way you slice it, increasing taxes on this “2 percent” doesn’t seem very smart economically. Unfortunately, the US has spent itself into a corner. But I don’t see continuing to spend – at the expense of the business owners who can make the decision to “hire or hoard” – as the solution.
To Your Career,
Charles Dominick, SPSM
President & Chief Procurement Officer
Next Level Purchasing, Inc.
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