In Illinois alone, the state has Forty Four Billion ($44,000,000,000) of unfunded liability for pensions. The state does not even have the money to pay pharmacists for drugs they are providing to those on public aid or medicaid. And yet, the legislators (from both parties) want to talk about expanded "benefits"…. Who is going to pay? Right now if China sold all of the bonds it has bought from the United States the bond market would go through an upheaval, just like the housing market has, and the stock market.

Our Governments are irresponsible.

Collecting more tax is debatable. Distributing it to others is new to America!

I am a small business owner whose company nets more than $250k – not a one or two person non-employer small business owner who doesn’t create jobs and who is typically quoted as supporting Obama – but a growing, successful 30 person company grossing $7 million in revenues that I and my team of dedicated, talented, hard working and loyal employees have built from literally nothing starting nearly 20 years ago. To this day, we have not accepted even a single penny of outside investment – our entire strategy is to leave any profits in the company to provide working capital and fuel business expansion, ultimately leading to the creation of yet more jobs and an exponentially higher tax base. Even in this terrible economy, we have grown our staff 15% over the past six months, with good, high-paying jobs with a progressive benefits package.

Yes, I am one of the “wealthy Americans” and “well-off small business owners” that Obama likes to vilify and that the public seems to be making a mistaken lightning rod for their anger at this financial mess. Yet I am no Wall Street fat cat, no abusive CEO with a huge golden parachute. I am a regular guy – a mainstream small business owner who really is creating jobs and is really having positive economic impact in this terrible environment. I would rather cash in my retirement savings, mortgage my house, take out massive loans, or forego my own paycheck (for quarters at a time) than not make payroll and pay my employees everything they have earned on time. Believe me, over nearly 20 years these have all happened! I drive 10 year old cars, spend almost nothing on luxuries and live modestly. My goal is to grow my company to the point that it is an attractive acquisition target, sell it, and meaningfully share in the benefits with my incredible team.

Here’s the crux of my frustration. Everyone – the Obama camp, the media, the public – seemingly everyone is talking about how it’s a good idea to increase taxes on small business owners netting more than $250k in profits. The argument goes like this: The business owner gets to pocket $250k in profits, and how much does he really need? What harm does it do for him to forego just an extra 10% of so of that take-home for the greater good of the beleaguered middle class? He still has over $200k in his pocket after all, while the middle class gets less and less!

On the surface this is hard to argue, and if it were only true I’d happily go along too. But nothing could be further from the truth, and there is a fundamental misunderstanding that is giving rise to this entire mistaken line of reasoning. I have found in my own company that people simply haven’t been informed about the realities of a growing small business, and when they are, they see the fallacies and hollowness of the “spread the wealth” arguments.

Sure, many non-employer single person businesses (the 98% majority of “small businesses” netting under $250k that Obama is targeting for his hollow “tax benefits”) do run their companies as cash cow operations for the immediate and direct personal benefit of the owner. The owners of these companies largely do pocket the profits, as they are small service companies with no real need to build large reserves of working capital, inventory financing, new product R&D, and so on. But the US Census Bureau shows that these non-employer small businesses generate only 1/20th of the economic impact and jobs creation of the larger, growth oriented small businesses like mine.

Here’s the key point: And any small business like mine that has a goal of growth (actually creating good jobs along the way) has to leave those net profits in the company to fuel that growth and job creation. A growth oriented small business is NOT a cash cow for the immediate benefit of the owner, and the business owner does NOT “take home” the net profits the business is making. That is precisely where the “share the wealth” argument falls apart. This is a subtle, misunderstood, yet unbelievably important distinction that Obama doesn’t seem to grasp. Even Obama’s website mistakenly calls the >$250k in small business profits he is targeting “take home.”

Let me illustrate the fallacies in the “tax the small business owner” argument.

First, let’s consider a company like mine that is grossing $7M of revenues a year. That means each month we bill customers on average $583k. In today’s economy, every customer pays us late – on average 45-60 days on Net 30 terms. That means to simply float the credit I am extending to my customers, I need about $1 Million in cash (“working capital”) to pay employees and vendors who provided the goods or services sold to customers. That working capital is real cash that has to come from somewhere. The easiest and quickest way for me to raise that cash is to earn it from net profits. But under Obama (considering the 39.6% passthrough S corporation tax and limitless payroll tax he is proposing), nearly 45% of the net profits go to taxes despite the fact I don’t pocket them. That means to get $1M of working capital from the easiest source of capital I have (my own profits), I’d have to generate $1.82M of before-tax profits. Out of that $1.82M, $820k would go to Obama’s “tax the wealthy” plan and the other $1M would stay in my company.

Think about it – that $1M in working capital retained from my company’s own money cost me $820k – that’s an annual percentage rate of 45%! If I got that same working capital from a bank, it might cost me 7% APR. But if I want to do the responsible thing, avoid debt and reinvest my own profits to fund my working capital needs, Obama’s tax plan makes it OVER SIX TIMES more expensive! If a small business lender were charging 45% APR to creditworthy companies, Obama and his liberal cohorts would be investigating them for predatory lending! But this is exactly what Obama’s tax plan means to growing small businesses, and it will be our own US government taking the role of “preditory lender,” folks! With bank loans costing only 1/6th as much as the privilege of using my own profits, Obama’s plan only serves to even more deeply entrench a pattern of chronic small businesses debt – and since debt was a major factor driving the recent meltdown, is this really a good idea?

Oh, and to generate $1.82M of before-tax profits, I'd need $18M-$36M of revenues (remember, I am only at 7). Obama's fuzzy math just doesn't compute, and it makes it IMPOSSIBLE for small businesses like mine to fuel their own growth!

Second, a financially strong small business is defined as one making a net profit of 5-10% of revenues, before taxes. Obama’s plan would mean after-tax profits are around 3-5% of revenues – and this is best case, for a “strong” company. If my goal is to grow my company in a financially responsible way – funded out of my own profits – then that means I cannot grow it faster than 3-5% a year, best case. Folks, that is razor thin, and 3-5% is just one product recall, one lawsuit, one financial meltdown away from negative growth. Such a low after-tax profit caps how many new jobs I can create and how quickly I can add to the positive economic impact my company is having to 3-5% a year, best case. The whole system is stacked against the financially responsible self-funded strategy of small business growth and forces many companies to seek outside investment – from investors who are increasingly resistant and who frequently don’t act in the best long-term interests of the company or the economy as a whole.

Third, Obama’s tax arguments are based on the mistaken assumption that all of today’s >$250k small business profits would remain eligible for his highest two personal tax brackets. If Obama is elected, I will most definitely take perfectly legal and fully defendable actions to remove myself and my company from this punishing taxation level, so that I can continue responsible growth and job creation so that I can achieve my goals of a company sale down the road. Specifically, I will convert my company from an S-corporation to a C-corporation, whose profits are taxed at a much lower rate than Obama’s proposed new plan, and do not pass through to my personal 1040. What that means, folks, is that the new tax revenues Obama projects he’ll generate will never be realized. Under the current 33% top personal tax bracket, it doesn’t make sense for me to switch my company to a C-corporation with all the hassles that are involved. But under Obama’s plan, a C-corporation is by far the better choice, and I will make the switch. I’d be foolish not to. His plan simply doesn’t take this into account. Just like Canada and the EU are planning “what if” scenarios if Obama is elected, so too are US small business like mine making similar analyses right now. It won’t be pretty if it really becomes necessary to put these plans into action, folks.

Lastly, if all a healthy and dynamic growing “employer” type of small business can only generate is 3% after tax profits under Obama, some are going to ask the uncomfortable question “why bother?”. I can get 3% from a CD today, without all the huge headaches and risks of running a small business, and I could spend far more time with my wife and kids. If this option is more viable, I’d be foolish not to consider it. This is what many people don’t realize – 3% best case net profits from a small business is far less than alternative ways the owner could put the investment they have on the line to use, and simply isn’t commensurate with the hair-raising levels of risk and sacrifice they routinely subject themselves to. If it becomes not cost effective for small businesses like mine to exist, many will cease to. That will have a devastating impact on the economy.

Bottom line, the “tax the wealthy small business owners” and “spread the wealth” arguments are just more in a long line of simple-minded answers to very complex issues that is the hallmark of the left. These hollow and misdirected arguments are supported on emotion combined with some catchy sound bytes and strung together snippets of out-of-context statistics, and are being sold to a public that is well intended but ultimately doesn’t have any real understanding small business. But when you really look at the facts, these proposals are exactly the opposite of what small businesses really need to be successful – reduction in the tax rate on net profits reinvested in the company, not massive increases.

Your business is not supported by poor clients, it is the rich kids and I know my daughter will not be going to gym and the cheerleading will be reduced if obama tax policies affect my company

I will lay off some people and look to economize, cuz I am no longer working for the "spread the wealth" crew

This will be the sames as in the clinton years affected me and my company. I was broke n 2004-2005, back in 2002 and starting taking hits in late 2007 after the democrats took over congress and started the credit freeze – the low income credit fiasco has been going on since 7/07. The media just caught up and obama needed cover for his radical buddies and total lack of experience.

Good luck on your continued troubles.

I hope you will remember your rosy predictions when you start blaming obama 2-4 years hence