Taxing Small Business

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President Obama's plan to balance the federal budget combines across-the-board spending cuts with a tax hike on individuals making more than $200,000 a year, or couples making more than $250,000.

Republicans oppose those tax increases, arguing that higher income brackets include small business owners, and that raising their taxes forces local retailers, mom and pop stores, and entrepreneurs to pull back on the hiring and investment we need to rebuild our economy.

But is this really true? Take my small business as an example. I run a software development studio here in Northern California. A year ago we had one of our best years ever -- we made almost $900,000. If the president's plan goes through, our taxes would go up, right?

Well, no. The $900,000 was our gross earnings. Most of it -- about $700,000 -- paid the people who work for us. Another $20,000 went to expenses like rent, insurance and new computer equipment -- all tax deductible. The remainder was split between my partner and me for our own salaries. So in the end we each paid taxes on about $90,000. Like I said, it was a good year. And still well below the quarter million mark.

You see, the money I spend on employee salaries, buying new equipment, research -- the spending that drives our economy -- also helps reduce my tax burden as a small business owner. In fact, the higher taxes get raised, the more motivation I have to reinvest everything I earn back into my company.


The president's proposed tax increase is on the money that's left over -- the profit I didn't reinvest and took as salary. Sure, some businesses would be hit -- like lawyers, athletes and entertainers -- but they're not the hiring and investment engines our economy needs.

When it comes to salary, small business owners like me are no different than anybody else. A quarter million dollars sounds pretty good. Maybe one of these days my business will be successful enough to pay me that well. And I'd like to think that, if I ever get there, I'll be OK with giving a little more back to the country and the economy that made it possible.

With a Perspective, I'm Matt Small.