Saturday, July 14, 2012

The Petty-bourgeois Versus The Bourgeoisie

We have all heard it , those small businessmen are the motor of growth, the creators of wealth and jobs.They are the hustlers and the wheeler-dealers, the play-makers and the risk-takers.  Around half of small businesses reported gross sales of under $50,000 a year. Most businesses, it should be noted, are sole proprietors. 90 per cent of small firms have fewer than 20 workers, employing 21.6 million people on an annual payroll of just $726m. About 60 million people are employed by small businesses for an annual payroll of $2.1bn, according to 2006 figures compiled by the US Census and federal Small Business Administration. That's less than half of the total number of wage earners (150 million) in 2010 after the economy grew worse. And that's if you define "small" as having as many as 500 employees.

Do small businesses create jobs?  It's at least debatable whether small businesses drive anything. A Federal government study found it is the bigger firm, that's more likely to hire. Just 16 per cent of jobs came from firms with less than 20 workers, the Fed study showed, but 39 per cent came from firms with 500 or more. Small business are just too small to put to work all the people who need employment. Those that can aren't small.

Still, jobs are jobs and small businesses create the most jobs, right? Well, that depends on what you're talking about - gross or net. A report by the Federal Reserve Bank of St Louis studied job growth between 1992 and 2010. It notes that gross job gains were 2.8 million per quarter. That's very impressive. But if you take into count the number of small businesses that failed, that number is dramatically lower: just 173,000. Not so impressive compared to the spin but what is more it suggests the turmoil and  churning experienced by small business owners.

Do small business owners make more than $250,000?

The federal government's Office of Advocacy released a 2010 report on the income and wealth of small business between 1998 and 2007. Most had annual household incomes of less than $99,000 in 1998, 2001, 2004 and 2007. Only 15-19 per cent had incomes over $100,000. 13-15 per cent between 1998 and 2007 were classified as S corporations, which means a tax up or down makes little difference since they usually don't pay federal income taxes anyway.

US non-financial corporations are sitting on about $2tn in cash — nearly $7,000 per American — with no place to invest it profitably. This money cannot even be invested to earn the rate of inflation. All this capital is sitting on the sidelines waiting for profitable opportunities to be invested, But what they need to make that money make more money is investment potential - prospect of profits. In 2010 all wages, salaries, bonuses, independent contractor net income and other compensation for services came to $6,009,831,055,912.11. That’s a bit more than $6 trillion. Adjusted for inflation, that is less than each of the previous four years and almost identical to 2005, when the U.S. population was 4.2 percent smaller.

The broader picture

Median pay — the halfway point on the salary ladder has declined but average pay rose and the statistical anomaly is explained because of continuing increases at the top. Average pay was $39,959 in 2010, up $46 — or less than a buck a week — compared with 2009. Average pay peaked in 2007 at $40,764, which is $15 a week more than average weekly wage income in 2010. While the number of workers making $1 million or more rose to almost 94,000 from 78,000 in 2009. While at the very top, the number of workers making more than $50 million rose in 2010 to 81, up from 72 the year before.

Six American families paid no federal income taxes in 2009 while making something on the order of $200 million each. In addition to the six who paid no tax, another 110 families paid 15 percent or less in federal income taxes. That’s the same federal tax rate as a single worker who made $61,500 in 2009. Overall, the top 400 paid an average income tax rate of 19.9 percent, the same rate paid by a single worker who made $110,000 in 2009. The top 400 earned five times that much every day. Let’s return for a moment to the single worker who made $61,500 in 2009 and paid 15 percent of his salary in federal income taxes. The top 400 made more every three hours than he did in a year, and yet many of them paid the same or a lower tax rate, according to the data in the report. On top of his $9,225 federal income tax, he also paid $9,409 in payroll taxes, which include Social Security and Medicare taxes. Half of the payroll tax was deducted from his check. His employer paid the other half, which was really hidden wages taxed at a 100 percent tax rate. His total federal tax burden was 30.3 percent, exactly 50 percent more than the 20.2 percent tax burden, measured the same way, on the 400 at the top.

Congress has created two income tax systems, separate and unequal, burdening millions much more heavily than the few, those with gigantic incomes and a propensity to make campaign contributions. One system is for wage earners and pensioners, whose taxes are withheld from their checks. This rigorous, efficient system taxes them fully. The other system is for business owners, executives, managers of hedge and private equity funds, name brand athletes and entertainers, and many others with huge incomes. Congress lets them put unlimited amounts of income in sheltered accounts and put off paying taxes for years or even decades. Deferral does not prevent these super rich Americans from spending their money. Hedge fund managers and others can borrow against their untaxed wealth, currently at interest rates close to zero. So long as their wealth grows faster than their borrowing their net worth continues to increase. By what economic, political or moral standard should working stiffs be forced to pay their taxes immediately, while plutocrats pay their taxes by-and-by? And why should anyone who makes more than $200 million live tax-free?

The annual report, which the IRS typically releases with a two-year delay, covers the 400 tax returns reporting the highest incomes in 2009. These families reported an average income of $202.4 million. The IRS report covers only the 400 highest incomes reported on tax returns, not the 400 highest actual incomes, which I am certain are much larger on average because of deferrals. That means the report overstates the tax burdens of the richest Americans pay.

To give this a sense of scale, the top 400 are financial giants compared to Mitt Romney. It took Romney a quarter century to build up a fortune that his campaign says is between $190 and $250 million. The top 400 made about that much in one year.

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