As a small business owner I have been trying to think through the rationale the Republican Party uses to sincerely make the claim that President Obama is raising taxes on small business. I understand the idea that limited liability corporations and S-Corps ‘net’ gain is taxable as personal income to the owner. Therefore, if a small business owner makes over $250,000/year in personal income and the Bush tax cuts for the wealthy are allowed to expire, paying the same taxes they did in the Clinton years, they will be paying a slightly higher rate in taxes.

With that in mind, let’s clarify another point. Whether you are a big corporation or a small business the general idea of taxes is that your net gain is what is taxed. For larger corporations, their taxable gains are ‘net’ and taxed with the corporate tax rate. If they expand the corporation or buy new companies, that is a tax write off for them. The taxes they pay are calculated by subtracting their profits from their losses to come up with the ‘net’ gain that is taxed with the corporate rate. This is how a company like General Electric can get away with paying no income taxes. No matter what the corporate tax rate is, if you effectively pay no taxes because you ‘create jobs’, zero is still zero. The difference is that the tax code gives you incentive to create jobs as opposed to letting the cash sit in a corporate account somewhere. The executives and owners of the company (even if they are merely investors) are paid as personal salary or capital gains (capital gains is still ‘net’ – after market losses). If they make over $250,000/year, letting the Bush tax cuts expire will give them more money to decide what to do with. This decision will effectively be the same calculation as discussed below for the small business owner.

If you are a small company and the owner makes 5 million dollars a year in income, the owner can decide to pocket that money and pay more taxes, in this case on the 4.75 million dollars if the Bush tax cuts expire, over $250,000/year. However, if the owner decides to put 4 million dollars into ‘creating new jobs’ he will either start a new business or add more positions to the business he already owns. The expense of creating a new business, employees salaries, capital equipment is all a loss (or deductible) on a profit and loss statement. Therefore, the owners ‘net’ gain is the offset of gains and losses. The effect of this is to reduce the ‘net gain’ of the small business owner and therefore to reduce the amount of taxes the business owner has to pay over $250,000/year. If the small business owner is a “job creator” then this necessarily implies that the creation of jobs is a tax write off for him or her. Effectively, this is the same as the “zero is still zero” concept for large corporations. If the small business owner decides to pocket that money and invest it, even if he or she loses money in the market on investments, that also can reduce the ‘net’ capital gains that are taxed. The only way that more taxes are incurred by the owner in letting the Bush tax cuts expire on the wealthy is if the owner takes the whole gain as ‘net’ gain…basically puts the money into savings or consumables. Therefore, if the small business owner is truly creating jobs then they save on the taxes they would otherwise have paid by simply pocketing the money. For wealthy folks, this calculation is an incentive to reinvest their money especially since they probably already have all the cash (savings and retirement), houses and cars (consumables) they need for the rest of their lives. Therefore, the incentive of reducing their taxes by not letting the Bush tax cuts expire is not to reinvest but to stuff more cash into their already bloated mattress (or to get to non-taxable foreign accounts).

Here is the rub…I am assuming that the smart, business Republicans already understand this concept since, as rich folks, they make these calculations all the time. I also know that all the money, time and expense they put into getting folks that are not needing to make ‘the calculation’ and do not understand the tax incentives for wealthy folks to create jobs is an expense for the wealthy. Therefore, if you take the money they put into getting their ‘wealth-friendly’ politicians in office as an expense versus the small amount of extra money that they would have to pay if the Bush tax cuts expire, the incentive (or net gain after the ‘political’ expenses) must be proportionally MUCH larger than simply biting the bullet and paying the extra taxes on their ‘personal’ (mattress stuffing money) income. First, this gives you an idea of how much opulence and luxury they really enjoy. Second, the ‘political’ expense is purely for manipulating those Republicans that are not as ‘calculating’ as themselves. Third, the old stereotype of rich pig-ish-ness (or better priggishness) is actually more true than I thought it was.