by | BUSINESS, ECONOMY, GOVERNMENT
The most misunderstood and misused phrase in economics and politics is that “small businesses are responsible for 2/3 of all new jobs”. This sentiment, uttered by President Obama last August, was gleaned from data produced by the SBA, which reported that small businesses “generated 65 percent of net new jobs over the past 17 years”. Since then scores of pundits, analysts, economists, and politicians have regurgitated the sound bite to meet their own specific agenda.
The problem, however, is that the definition of small business is misunderstood – and has different definitions – to different people. Obama maintains that “small businesses with fewer than 50 employees…are the businesses that usually create most of the jobs in this country”. Unfortunately, he uses this line to justify credits for small business (health care, etc). That makes for good political speech, but those businesses doesn’t make jobs. His assertion is patently untrue.
The SBA is the group who sets the legal definition of a “small business” which is one with fewer than 500 employees . Going back and using the data from them – and cited by Obama – it is clear that his threshold about small businesses – under 50 employees – is incorrect. SBA data shows that “much of the job growth (of the 65% net new jobs) is from fast-growing high-impact firms, which represents about 5-6 percent of all firms and are on average 25 years old”. Clearly then, the majority of these are not businesses with fewer than 50 employees.
Small businesses under Obama’s definition tend to share similar characteristics: they typically have a more localized market, lack of abundant and available credit and capital, and lower volume of sales than their larger small business counterparts. As such, these businesses lack the necessary qualities to create the type of job growth that Obama references.
Even more frustrating is the fact that Obama wants to raise taxes on those earning 250K or more. To the average household, 250K sounds like a high-income threshold. What he doesn’t tell you is that this effectively also raises taxes on small businesses, the very group he purports to want to help. Most small businesses file as sole proprietorships, LLCs, and Scorps, and by doing so, pay taxes at individual rates. In the realm of business, 250K is not a lot. Raising the margin for those earning over that amount will raise tax rates on small business owners, thereby reducing their profit margin to reinvest in their company or create new jobs.
Either Obama is clueless about small businesses and job creation, or he is lying. Either way, one thing that is not misunderstood is his incompetence.
by | ARTICLES, ECONOMY, GOVERNMENT, NEW YORK
Crains New York had a good piece on the living wage legislation currently being debated in NY. “The Bronx lawmaker said the bill, which would compel employers at projects that receive city subsidies to pay $10 an hour plus benefits, or $11.50 without benefits, is designed to “build a stronger economy,”.
I’ve spoken in earlier posts about the need for economic impact studies in NY with regard to financial legislation — just as construction projects necessitate an environmental impact study in order to assess the pros and cons and to find out the true cost, the same process should be applied to economic legislation. A bill such as this perfect fodder for this type of assessment.
LIVING WAGE BILL GETS WATERED DOWN
Councilman Oliver Koppell, the primary sponsor of the City Council’s controversial living wage bill, has been writing to its opponents in recent weeks to explain its “core rationale” and to propose ways to narrow its scope.
The Bronx lawmaker said the bill, which would compel employers at projects that receive city subsidies to pay $10 an hour plus benefits, or $11.50 without benefits, is designed to “build a stronger economy,” and that it was never intended to apply to nonprofits, small businesses and residential projects.
He said he’s considering broadening an exemption to carve out small businesses with annual revenues of $1 million or less; raising the subsidy threshold that triggers the bill to above $100,000; clarifying that certain subsidies like the Industrial and Commercial Abatement and J-51 incentives are exempt; and reducing the record-keeping requirement to six years from 30.
A source close to the Council said the subsidy threshold could be bumped up to as high as $1 million and the small business exemption could be raised to as much as $5 million.
In an interview, Mr. Koppell said the proposed amendments stem from testimony provided by opponents at a City Council hearing on the bill last month. “We don’t want to do anything that will discourage economic activity,” he said. “There are some clear issues raised at the hearing that should be taken care of.”
Proponents of the bill say the city should not subsidize projects that create “poverty-wage” jobs. They argue that stores benefit indirectly from subsidies granted to their landlords, and thus it is fair to ask them to pay more than the state minimum wage.
Opponents, however, contend the bill is flawed beyond repair and say amending it will not satisfy them.
“Koppell is trying to change the bill primarily because there has been broad opposition voiced to the legislation from across all five boroughs,” said Nancy Ploeger, president of the Manhattan Chamber of Commerce, a member of the Five Boro Chamber Alliance, which is leading opposition to the bill. “Wage mandates, regardless of amendments from the City Council, are a nonstarter from the perspective of the business community.”
Ms. Ploeger said she has written to Mr. Koppell on behalf of the coalition offering to meet with him to “discuss ways to promote job creation” in the city. “This bill is not one of them,” she said.
Proponents of the bill said they consent to Mr. Koppell’s proposed changes. “We’re trying to get a bill passed,” said a spokesman for the Living Wage NYC coalition, which is led by the Retail, Wholesale and Department Store Union. “These changes actually strengthen the bill while keeping its core focus the same.”
The bill has 30 sponsors in the City Council, four shy of the number needed to overcome a veto by Mayor Michael Bloomberg, who has expressed disdain for wage mandates.
But City Council Speaker Christine Quinn, who decides whether the bill comes to a vote, has yet to take a stance on the measure. She did meet with Mr. Koppell to discuss the revisions and expressed appreciation for his willingness to compromise. But she is focused on crafting a city budget for the fiscal year that begins next month, not on living-wage legislation.
“Basically, I think the speaker’s view on the bill is ‘let’s get the budget done,’ Mr. Koppell said.
by | ECONOMY
It occurred to me recently that new spending bills in NY city should require an “economic impact study”. Just as construction projects necessitate an environmental impact study in order to assess the pros and cons and to find out the true cost, the same process should be applied to economic legislation.
To illustrate my point: Mayor Bloomberg passed an ordinance in NYC outlawing smoking in bars. He enacted this so people would not have to work in a smoking environment, but his constituents should have the right to know what the economic cost was in terms of reduced tax revenue! If there had been an economic impact study on this or any similar legislation, the taxpayer would have had the opportunity to see any fiscal advantages and disadvantages of such a feel-good proposal before it was made into law.
An another example, domestic household help in New York State has recently become subject to virtually the same employer rules as large companies are, and many people do not get employed because of this obstacle. The unemployment rate among low-wage earners is disproportionately high due to legislation that strangles our economy under the guise of “regulation”, “fairness” or other similar government disingenuous justification.
A final example, my favorite, involves the little discussed change of the name of the Triborough Bridge to the Robert F. Kennedy Bridge. Might the taxpayers of NYC have gone up in arms if they had been told of the tens of millions of dollars of cost incurred for that change to take place — from a name that described the purpose of the bridge to a name that has had no meaningful history with the city?
Conducting an economic impact study on potential law would provide a way to keep taxpayers informed, politicians accountable and reckless spending under control.
by | ARTICLES, ECONOMY, NEW YORK
Having solved all other fiscal problems in NY, our legislators are working to kill more businesses with this bill. Below is an article from Cranes New York
Advocates for a law requiring city businesses to offer their employees paid sick days step up their efforts as similar measures advance in Connecticut and Philadelphia.
Connecticut legislators are about to pass a bill to make their state the first in the nation to require employers to provide workers with paid sick time. And City Council members in Philadelphia are expected to vote Thursday on a bill mandating up to seven paid sick days per year for workers.
With that momentum, advocates in New York City are stepping up efforts to revive a sick-pay bill shelved last year by City Council Speaker Christine Quinn over concerns that it would harm small businesses.
“Making sure New Yorkers can take a day off when they are sick or need to care for their children—without having to miss a paycheck or worry about losing their job—is the right thing for workers,” said Councilwoman Gale Brewer, the bill’s lead sponsor. “Our neighbors [Connecticut and Philadelphia] recognize the same logic and know it’s the right thing for businesses, too. The time has come for paid sick days in New York City.”
The Council bill is being pushed by the New York State Paid Family Leave Coalition, an alliance of more than 400 labor, community, business and women’s groups. As in Connecticut, where lawmakers could vote Friday or Saturday on sick pay, the local chapter of the Working Families Party is an active member of the group. Members are meeting regularly and expect to soon re-launch a public campaign geared towards bringing the bill to a vote this fall.
Ms. Brewer said she will be meeting with fellow Council members to let them know about the developments on sick pay around the country.
Her bill would require businesses with 20 or more employees to offer nine sick days a year and smaller businesses to give five. It has 35 sponsors in the Council, one more than needed to overcome a potential veto by Mayor Michael Bloomberg.
Despite her members’ sponsorship, Ms. Quinn did not let the bill get to a vote last year, contending it would have a crushing impact on small businesses in a down economy. She promised to revisit the issue every two months, assessing whether economic conditions had improved.
The city’s economic recovery has outpaced that of the nation, with the five boroughs adding nearly 40,000 jobs in the first four months of the year, according to real estate services firm Eastern Consolidated. In the past 19 months, the city has recovered more than half of the jobs lost in the downturn, while the nation has recovered only about 20% of its losses.
“Even though the city’s fared better, we’re far from seeing the light at the end of the tunnel, especially when you’re looking at small businesses,” said Linda Baran, president of the Staten Island Chamber of Commerce, part of a coalition of chambers that led opposition to the bill last year. “Locally, I don’t know any small businesses that are hiring. They’re concerned about making their payroll.”
Carl Hum, president of the Brooklyn Chamber of Commerce, said that one only need to look at Friday’s weak national jobs report to know that the economy is “still pretty fragile.” He said that the Connecticut bill appears to be moving forward “over the objection of business groups” and that “the difference here in New York is that we have a speaker that brought the business community in to talk about the bill.”
A spokesman for Ms. Quinn said that conversations with Ms. Brewer about paid sick days are ongoing. Ms. Brewer said that the speaker has asked about the upcoming vote in Philadelphia. It’s unclear if she will be swayed by efforts in other states, which are being led primarily by the 15-state consortium Family Values @ Work.
In addition to the votes in Connecticut and Philadelphia, the Seattle City Council is set to introduce a sick-pay bill on Wednesday; a bi-partisan group of state legislators in Georgia led by five Republicans is supporting a measure to allow workers to use sick time to care for children and other family members; and a coalition in Denver is pressing for a ballot initiative on sick days in November. San Francisco and Washington already require paid sick days.
The White House has also entered the fray, hosting a series of workplace flexibility forums—including one in New York City this week—designed to help American workers meet the demands of their jobs without sacrificing the needs of their families.
“We know New York is different, and we’re willing to work towards what would make sense for everybody,” Ms. Brewer said. “But I’m hoping that the national momentum pushes us here.”
by | ARTICLES, ECONOMY, TAXES
Nothing riles Americans quite like taxes: who pays what, whether the government needs to raise them or might slash them, and how much they’re eating away at our paychecks.
And when it comes to tax avoidance — the legal means of minimizing one’s tax burden — a growing chorus of critics say high tax rates are to blame, and an overly complex tax code isn’t helping. The emerging point of view: The higher tax rates get, the more people will try to figure out ways to stop paying them.
As evidence of that, analysts point to the relatively steady chunk of gross domestic product that can be attributed to tax revenues, even as nominal rates rise and fall. From 1950 until 2010, all federal taxes hovered between 15 percent and 20 percent of GDP, though top income tax rates varied wildly (from 28 percent to 91 percent) during that period. And that suggests a greater reliance on loopholes when rates are higher, experts say.
“When tax rates are that high, nobody is going to pay,” says Alan Dlugash, an accountant at Marks Paneth & Shron LLP in New York. “You’re going to find a way to get out of it,” he says. In fact, he says his high-end clients in New York are holding onto stocks and avoiding selling their business for fear of being bulldozed by a giant capital gains tax bill.
Big business appears to be following suit. The New York Times reported in May that loopholes in the tax code have meant U.S. multinationals are paying far less than the corporate tax rate (one of the highest in the world), leading one expert to conclude that U.S. businesses were “world leaders in tax avoidance.”
The Internal Revenue Service doesn’t have specific figures on the revenue lost each year to tax avoidance, but nearly a decade ago it reported a tax-gap of $345 billion, the vast majority of which was lost to under-reporting. That figure hasn’t been updated since 2001, though the IRS says plans are underway to release more current stats.
Tax critics, meanwhile, are busily trying to prove the harmful effects of high tax rates. For example, raising $1 trillion in tax revenue costs the economy and taxpayers an additional $110 to $150 billion, according to a 2009 report by Robert Carroll, a fellow at the conservative-leaning Tax Foundation. And a 2008 IMF paper argues that lowering the tax rate would effectively increase tax compliance and raise revenues.
Nina Olson, national taxpayer advocate at the IRS, says she hasn’t seen any definitive evidence that high rates contribute to tax avoidance; the problem, she says, is ambiguity: the tax code has undergone a staggering 4,428 revisions in the last decade. The code itself is some 3.8 million words, creating endless opportunities to exploit the system and confusing even those who want to comply into unintentional non-compliance.
“People find it confusing. And if you don’t understand it, then you’re going to feel ripped off,” Olson says, adding that a person whose marginal tax rate is 28 percent could actually pay only five percent once all the various tax benefits are factored into the equation.
Olson’s office is examining the root causes for non-compliance, looking specifically at attitudes towards tax, education, the influence of tax professionals, enforcement and even civic duty.
Not everyone is convinced that lowering tax rates would stem the wave of tax avoidance. Ted Gayer, a senior fellow at the Brookings Institute, acknowledges that high taxes impact the economy through consequences such as lower labor supply and disincentive to invest. But slashing taxes won’t bring a tide of new revenue, he says.
“When you change taxes, you’re going to get a behavioral response,” Gayer says. “But we shouldn’t fool ourselves into thinking we can get a free lunch by lowering tax rates and collecting more revenue. I don’t buy it.”
by | ARTICLES, ECONOMY, GOVERNMENT, TAXES
(Reuters) – Alan Dlugash is a New York accountant who specializes in high net worth Manhattanites, but lately he’s been fielding a lot of calls from clients in neighboring states — Connecticut and New Jersey.
“The big deal right now is ‘how do I change my residency?'” he said. And the reason is almost always the same: High local taxes.
Given the extension of the Bush era federal tax cuts for two years, a cut in Social Security tax this year, and the rise of anti-tax sentiment evidenced in last November’s election results, tales of tax migrants may seem out of sync. Just last week, a number of ‘we’re undertaxed’ reports surfaced suggesting that Americans were facing their lowest tax burdens since 1958.
That ignores the idea that just as all politics is local and personal a lot of taxes are too – and in recent years the states and cities have been busy offsetting federal tax cuts with local tax hikes, largely aimed at higher income earners.
Since the beginning of 2009, some 31 states have hiked taxes on everything from income, estates, and investment gains to cigarettes and plastic bags, with annual net increases pushing $50 billion, according to data from the National Conference of State Legislatures. City and county governments have been piling on too, raising sales and property taxes in many areas even as home values drop.
For example, with last week’s passage of a two-year, $2.6 billion tax hike, Connecticut – home to much of the hedge fund industry – raised rates on income and investment taxes for the second time in three years.
It had already pushed up the rate for those earning more than $500,000 to 6.5 percent from 5 percent in 2009. Now, it has boosted the top rate to 6.7 percent, raised sales taxes and added an extra luxury tax on items like pricey boats and bracelets.
Earlier this year, Illinois approved a $6.8 billion income tax hike — pushing its flat tax rate to 5 percent from 3 percent. In California, which still doesn’t have a budget for the fiscal year which starts on July 1, Governor Jerry Brown is trying to extend a 0.25 percentage point increase, which took the top rate to 10.55 percent in 2009 but that expired on January 1.
And there could be more local levies to come, as some experts believe states will have to turn to taxes as they face enduring shortfalls and the loss of federal stimulus funds.
All of which means that Dlugash and other accountants are fielding a lot of calls from people who are wondering if there’s anything they can do, from decamping temporarily to low-tax Florida, to buying into money-losing tax shelters, just to cut their local and state tax burdens.
“People are not happy about the direction in which all the state and local taxes are going,” said Charles Barragato, an accountant and financial adviser with offices in Connecticut and New York. “We’re seeing more of a focus on the state tax implications of any plans. More sophisticated clients are looking at trusts.”
In 2000, the average U.S. household was paying 9.4 percent of its income in state and local taxes, according to data from The Tax Foundation, a conservative leaning think tank.
By 2009, the last year for which figures are available, and the year in which the biggest round of recent tax increases were enacted, that had risen to 9.8 percent.
This increase, though significant, isn’t enough to outweigh the Bush tax cuts in 2001. After all, they reduced the top federal income tax rate to 39.6 percent from 35 percent.
But the results of the state and local taxing jag are felt disproportionately in affluent areas that already had comparatively high tax rates, such as Dlugash’s stomping grounds in and around New York.
In New York City, a particular issue for the financial community and other high net worth taxpayers is the treatment of capital gains as ordinary income, resulting in a 12.85 percent rate on investment profits on top of the existing 15 percent federal rate.
That rate on salaries and investment income rose from 10.5 percent in 2002. Along the way, the state also did away with almost all tax deductions for higher income earners, and also increased state estate taxes.
“RUN OUT OF TOWN”
It means that a Manhattan family earning $400,000 with $50,000 in income from dividends and $150,000 in capital gains would pay $73,669 in state and local taxes in 2010, up 31 percent from the $61,986 bill they would have faced in 2000, according to calculations done for Reuters by TurboTax.
Furthermore, the 2010 state burden would have triggered an additional $4,264 in federal taxes because of the way state and federal taxes interplay at high brackets. On top of that, they now face property tax increases that have added thousands of dollars – or in some cases even tens of thousands – to their total tax burden.
“If Kansas legislators ever did to their farmers, or Texas did to their oilmen, what New York does to its financial community, they would have been run out of town on a rail,” Dlugash said.
It is no wonder that some wealthy New Yorkers find themselves holding on to stocks, bonds and businesses beyond their preferred sell date because they don’t want to pay the associated taxes.
That isn’t confined to New York. Richard Mandy, a lifetime Maryland resident who built a successful office furniture business, moved to Miami in Florida, where there is no state income tax, specifically for the purpose of selling his business when he was ready to retire.
He guesstimates that the move saved him more than $350,000 in capital gains taxes, enough to pay for his cushy new home. “As long as the (Maryland) Comptroller of the Currency doesn’t come after me, I’ll be absolutely delighted,” he says.
PROPERTY TAX SCOURGE
Real estate taxes have added another big burden for many homeowners, even as they saw the market values of their houses fall. Between 2005 and 2009, property taxes across the U.S. rose to an average 3.0 percent of income from 2.8 percent, the Tax Foundation reported. But those wealthier areas showed a disproportionate increase.
During that same period, property taxes went to 8.7 percent of income from 7.9 percent in Essex County, New Jersey, where many bankers and professionals who work in Manhattan live.
That means, a resident owning a $1 million house in Montclair, a popular New Jersey town, would pay $36,400 in property taxes now against $25,800 in 2005. There have been similar steep increases in parts of New York state.
Contrast that with the low taxes in some southern states.
In many counties in Louisiana or Alabama, owners of a $1-million home would owe only about $5,000. And, to rub it in, the house would be enormous by comparison with homes in expensive parts of the northeast.
It all means that middle and upper income earners in the northeast can easily pay tens of thousands more in tax than their equivalents in many other states.
We also shouldn’t forget that higher earners in high-tax states often get hit with a double whammy when their state tax burden grows.
That is because of an almost unique American invention called the Alternative Minimum Tax. Originally conceived as a way to insure that even the wealthiest share in the national tax burden, it now catches many in the middle class because the government hasn’t adjusted the system for inflation.
But it adds insult to injury, hitting those who already pay high state and local taxes hardest by adding those back into the calculation before additional federal tax is imposed.
“It’s a big hurt on the middle level of our clients,” says Wayne Berkowitz, an accountant with Berdon LLP. “The middle tier is getting whacked by the AMT as state and local taxes go up.”
But a lot of this is backward looking you may say. Surely, the anti-tax atmosphere means that there won’t be many more hikes, and that spending cuts will be the key to dealing with budget deficits? Meanwhile, some of the state hikes are already scheduled to expire.
“The trend is going to go down a bit, because states are beginning to realize that people will leave,” says Berkowitz. In fact, the 2010 Census did show a decade-long migration to low-tax havens like Florida and Texas, while high tax states like California and New York barely held their population levels.
But still unresolved budget gaps could lead to more tax hikes in the next few years if budget cuts become so deep as to be unpalatable, suggests Elizabeth McNichol of the Center on Budget and Policy Priorities. Her organization has noted that states will face the added burden of losing some $60 billion in federal stimulus funds beginning on July 1.
The NCLS has pegged fiscal year 2012 shortfalls at $86.1 billion, and says states already expect more than $30 billion in gaps for the following year.
“Certainly we still see states struggling with their budgets and looking for ways they can raise revenues and make their budgets balance,” said Greg Rosica, a tax partner at Ernst & Young.
And many believe that with a federal government currently spending about $1 for every 60 cents it takes in from taxes and other revenue, Washington won’t be able to get the deficit under control through spending cuts alone and will soon by rejoining the tax hike party.
(With additional reporting from Lisa Lambert; Editing by Martin Howell)
Corrects change in top federal tax rate in paragraph 14.
