I have avoided politics on this blog since its inception, but I’m writing about the U.S. presidential race this week because it’s turning out to be one of the most important campaigns of this generation.  However, I want to stay within the themes of this blog (i.e., money, investing, entrepreneurship, etc.), so I thought I’d focus on the financial facts about Barack Obama and why his proposed monetary policies are terrible for businesses, entrepreneurs, and money and investing in general. 

In short, America cannot afford to have this man become President.  Our wallets cannot endure four years of a Barack Obama presidency. 

John McCain has some drawbacks as well, but Obama’s monetary policies will have a far more drastic effect on this country than anything McCain will do.  Thus, I think it’s imperative to look at certain key facts about Barack Obama and how they will affect the U.S., its economy, and businesses and entrepreneurs.

Facts About Barack Obama graphic 1Monetary Facts About Barack Obama

Obama has promised to implement and/or advocate the following policies:

1) Allow the Bush tax cuts to expire for Americans earning more than $250,000 per year.

2) Increase long-term capital gains tax rates from 15 % to 25 %.

3) Increase Social Security taxes by subjecting income over $250,000 to a 12.4 % tax.

I want to look at the effects (particularly the economic and business effects) of these policies, but I can’t do that all in one post.  It’s a lot of information, so I thought I’d spread it out over three posts. 

So today, I will look at the effect of Obama’s promise to allow the Bush tax cuts to expire.  Tomorrow, I will look at the effect of raising the capital gains tax.  And on Friday, I will look at the effect of increasing the Social Security tax.    

Expiration of Bush Tax Cuts

Currently (under the Bush tax cuts), the top income tax rate is 35 %.  Under Obama, that rate would go back up to 39 %.  Obama claims that this shifts the tax burden to American households that earn more than $250,000 per year . . . or, in his words, the “wealthy.”

Burden on Small Businesses, Not “Wealthy” People

But he’s wrong.  This logic (i.e., shifting the tax burden to the “wealthy”) assumes, first, that people who make $250,000 are wealthy.  In today’s economy of inflated real estate prices, high gas prices, and a falling dollar, $250,000 only goes so far and doesn’t even come close to equaling “wealth.” 

But there’s a bigger problem with Obama’s logic.  He isn’t shifting anything to the wealthy.  Instead, he’s shifting the tax burden to small businesses.

Several articles, including this one, have pointed out that about two-thirds of the $700+ billion of income from small businesses in 2006 was reported by households making $250,000 per year or more.  (Income for “small businesses” is primarily derived from sole proprietorships, partnerships, and S-corporations.) 

Note that these are the same households (i.e., those making more than $250,000 per year) on which Obama wants to increase taxes.  Thus, raising taxes on these households will effectively raise taxes on most small-business profits in America.

How High Will Taxes Be For Small Businesses?Facts About Barack Obama graphic 2 

Under President Obama, the S-corporation tax rate would rise from 35 % to 39.6 %.  The tax rate for sole proprietors and general partners, however, would rise from 37.9 % to 50.3 %.  (Sole proprietors and general partnerships have to pay income tax and the Medicare portion of the payroll tax.) 

A tax rate of over 50 % would be the HIGHEST rate a small business has paid since before Reagan was president.

Serious Economic Consequences

If two-thirds of all small-business income is taxed at 50 %, there will be serious economic consequences, including (1) fewer businesses, (2) fewer jobs, (3) more tax evasion and tax avoidance, (4) less federal tax revenue, and, ultimately, (5) a full-blown recession.

1) Fewer Businesses

Right now, the fastest way to achieve financial freedom is by starting your own business.  Under President Obama, however, a 50 % small business tax rate will discourage Americans from starting a small business or expanding or growing an existing one. 

Who would want to start a business where, if you achieve any level of success, you might lose HALF of the business’s earnings to Uncle Sam??  Any reasonable person would rather remain employed (and get taxed at 20+ % or 30+ %) than start a sole proprietorship or partnership (and get taxed at a top rate of 50 %).  A 50 % tax rate wipes away any financial potential of working for yourself or starting your own business.   

2) Fewer Jobs

Obama’s tax increases will also reduce the number of available jobs.  Small businesses create the majority of jobs in the U.S.  So do the math: If fewer people start small businesses, and fewer people expand and grow their small businesses, there won’t be as many businesses (and as many growing businesses) offering jobs. 

Even if you think that a sole practitioner like a doctor who makes $500,000 per year is “wealthy,” ask yourself this question: Have you ever gotten a job from a poor person?  The answer, of course, is “no.”  “Rich” people–or, more accurately, small and medium-sized business owners–provide jobs.    If you place such an enormous tax burden on these businesses, you prohibit them from growing (or starting up in the first place) and even might cause many of them to contract to save money.  And if businesses don’t get started, don’t grow, and if some have to downsize, there will be fewer and fewer jobs on the market. 

This is a stunning cause-and-effect that you don’t see reported in the media or in any popular publication.  Obama has stated (like every liberal) that he wants to create more jobs.  Yet his own tax proposals will destroy job growth!

Think about it in real-world examples.  In your town, the restaurant down the street that was about to open doesn’t.  The manufacturing company that just opened a new plant decides to close it two weeks later because it lacks the funds to sustain the plant during its initial stages.  The doctor who wants to leave a university to open up a private practice in the town center decides that his money can be better spent elsewhere. 

These events all have one thing in common: they don’t create jobs.          

3) More Tax Evasion

Tax evasion would certainly increase.  If business owners have to struggle to pay Uncle Sam, a good number of them might very well try to get crafty with their tax returns.  When the choice is between sustaining your livelihood (e.g., your handy man business or your moving company) or paying Uncle Sam, you can bet business owners will try to avoid paying some of their taxes.

4) Decrease in Federal Tax Revenue

Don’t pay attention to the media on this.  If you have fewer businesses, fewer sole proprietors, and fewer employees (due to fewer jobs) paying taxes, and if you have an increase in tax evaders, federal tax revenue will decrease.  Count on it.

5) Full-Blown Recession

If you’re keeping score at home, we have fewer businesses, fewer jobs, an increase in tax evasion, and a decrease in federal tax revenue.  We’ll also have higher unemployment and less innovation, investing, and entrepreneurship.  Fewer people will have money, and those who do will have less.  Less money means less consumption and less disposable income to spend on products and services. 

Facts About Barack Obama graphic 3These are the classic ingredients of a recession.  Obama’s tax proposals would bring this economy to halt.  We’re not even close to a recession yet (i.e., the economy grew 1% last quarter, and you need two straight quarters of negative growth).  If you think times are tough right now, just wait for Obama to take the helm. 

That’s not change we can believe in.  (It’s actually much of the same failed policies from the 1960s and 1970s.)  Despite the Harvard education (which, by the way, is overrated), these cold, hard facts about Barack Obama illustrate that he doesn’t have a clue about the economy.

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