Friday, January 23, 2009

Earners v. Entrepreneurs

Watching CNBC this morning, I heard Larry Kudlow complain about Democrats who want to raise taxes on the most “successful earners and entrepreneurs.” I find the use of the word “earners” very revealing. It is the word that the mafia bosses in The Sopranos used to describe their most successful underlings.

John Thain was a successful earner. In early 2008, he spent $1.2 million to refurbish his office at Merrill Lynch headquarters while the company was slashing jobs and businesses. In September, he arranged the sale of Merrill Lynch to Bank of America whose stock is down 80% since the deal was announced. The government has been forced to put up more than $40 billion to bail out B of A. Nevertheless, Thain thought he deserved a year end bonus of $10 million.

Dick Fuld was a successful earner. He made half a billion dollars during his years as chief of Lehman Brothers including $45 million in 2007. Lehman filed for bankruptcy in September sending markets into a tailspin.

I have no objection to tax policies that reward successful entrepreneurs because they make the economy go. However, a successful earner is not necessarily the same thing at all.


  1. I'm happy to raise taxes on people who run companies in to the ground, get public bailouts, and then give themselves big bonuses.

    You can do that if you promise not to raise taxes on the businesses (small or corporations) that earn $200k+.

  2. Does that mean that you think it's alright to raise taxes on businesses that make less than $200,000?

  3. No, but I don't think anyone's proposed that lately.

  4. Is anyone proposing such a business tax?

  5. I think ChrisB falls victim to the common misunderstanding of Obama's tax proposal (which I call the "Joe the Plumber problem"). What he said he would raise is the marginal tax rate on individuals who make over $200K per year, and families that make over $250K per year.

    The tax increase would indeed catch some small businesses (organized as sole proprietorships or S-corporations), but not nearly as many as most people seem to believe. That's because it doesn't apply to businesses which gross $200K/$250K. It applies to businesses that profit by at least that much. In other words, your business has to have an EBIDTA of at least $200K! And even then, the extra tax you pay is only on the portion of profit that exceeds that! I'd submit that if your "small business" is doing that well, then two things are true:

    1. It's not that small, and
    2. You can afford a few extra dollars of taxes.

    Let's take the simplest example possible: A single plumber (for exmample) whose sole source of income is his plumbing business, which is a sole proprietorship. Let's assume further that our plumber, let's call him "Joe" (for example), doesn't itemize, so that we're in ridiculously simple territory.

    In this example, "Joe" the plumber gets a standard deduction of $5,700, plus a personal examption of $3,650, for a total of $9,350 in deductions. So under the Obama plan, his business would have to turn a profit of $209,350 before he'd pay one extra penny of taxes as compared to current law.

    Now let's get completely ludicrous here. Let's say Obama raises the marginal tax rate on such a person from 33% to 39%, and let's say that "Joe" actually turns a profit of $250,000. He's made $40,650 that qualifies for the new bracket, and thus would have to pay the additional 6% on just that portion. His extra tax? $2,439.

    For those of you keeping score at home, "Joe" the plumber, having made $250,000 in profit over the course of a single year, would be subjected to a "whopping" 0.98% effective tax hike. Cry me a river.

  6. A correction to my above comment: I said "EBIDTA of at least $200K," but that's the wrong term, because some of the depreciation and amortization will be deductible, pushing that effective level higher. Replace "an EBIDTA" with "a net profit."