Author Archives: rbb

Hiring and Taxes

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My father used to say “I’d love to pay a million dollars a year in taxes.” And he wasn’t kidding.

As small businessman, with an 10th grade education, he knew that in order to pay that much in tax, even at the lower Regan era rates, he would have to have one heck of a net income. So why is it that all these pundits keep talking about how higher is taxes on the rich will kill jobs?

Perhaps our policy makers fail to understand the basic concepts set forth by Maslow. The pundits for the rich must not believe that man strives, irrespective of the circumstances, to return to a state where he is comfortable or strives to achieve more. How does this apply to business leaders, investors, hiring and taxes?

Let’s start with profit: Why does a business need to make a profit? According to the father of modern management, Peter Drucker, businesses need a profit to stay in business. This is why we have employment booms and busts.

When a business hires someone, they have but one goal in mind; to make additional profit with their investment (labor). Nothing else. Tax policy is not the reason, benefits programs are not the reason, and helping the community is not the reason, they hire to make additional profit.

You may be saying, if taxes are higher on the rich, or the government requires you to spend more on benefits, you are not going to hire anyone; Bologna. These are imputed costs of doing business. If you cannot meet pay for additional benefits with your current income model you will do either of two things; 1) Change you income/expense model or 2) Go out of Business. These are the only two choices.

As to taxes; Payroll taxes are part of the cost of labor calculus as is vacation, time off, workers compensation, health benefits and retirement contributions. If they are too high you either find a way to get more production out of your current team or reduce the size of the team to fit the production need. In other words you change the income/expense model.

Income taxes on the other hand are paid on the leftovers, the Net Profit, the amount left after all the other expenses have been taken. In the case of a small businessman, after they have expensed as much as they reasonably could. It has nothing to do with creating jobs.

OK, the pundits say that this is not true because if the person has less to invest, then job creation is stagnated. While seemingly a reasonable argument, it fails to pas the smell test. Are you investing in companies to make jobs or a profit?

Let me give you an example: Luigi owns a Pizza shop and has 2 Pizza makers, a dishwasher and cashier. Currently his gross income is $15,000 (1000 pizzas at $15 each) per week. From that he pays his suppliers, rent, utilities, personnel, payroll taxes, benefits, insurance etc., leaving him $2,500 per week to live on. Luigi wants to increase his personal income, mamma is not happy.

Luigi figures that between he and his pizza makers, they could make another 200 pizzas a week ($3000 in revenue), but they do not have the walk in business to support it. He calculates that the cost of a driver, with all taxes, benefits and car costs is $500 per week, additional suppliers, utilities and insurance $500 per week so that his net before taxes should be an additional $2000 per week bringing his gross to $4500 from $2500. Do you think he cares about the increase in his marginal tax rate?

Luigi, like all businessmen, hired someone because he believed it would add to his net income. This is the essence of hiring, not concern about benefits and tax rates. The scare tactics we see every day coming from our politicians and their pundit mouthpieces are designed to hide the simple truth: People, including big corporations, do what they think is in their own best interest. They hire when they believe the investment will pay off. The prospect of higher taxes does not stifle investment, not being able to believe their investment will be profitable does.

So, to repeat what my father used to say; “I’d love to pay a million dollars a year in taxes”, or as they said in Jerry McGuire “Show me the money”.

Performance Management and Taxes

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Every year, corporations set goals and performance standards. These then get pushed down to the Management team and the goals for higher sales and profits are set. The goal posts have been moved and it is time for the top performers to meet the objectives and earn their bonuses.

In fact if you are in the top 5% of income earners, over $159K Adjusted Gross Income in 2010, then you are not only a mover and shaker, but you in all likelihood have your pay tied directly to either your, or your company’s performance. And, your boss is not going to give you a raise because you “deserve” it, you will receive a raise only when you “earn” it. This is how performance management works. It is the old 80/20 rule that 80% of the value comes from 20% of the team. Furthermore, if you are in that top 5% and your income drops, you are going to do everything in your power to get it back to an amount you are comfortable with.

The fact is that each year the goals are pushed further and further and you respond. Additionally the company you either work for or own does the same thing. So critical is reaching the profit goals that when the Frank-Dodd Bill changed the way big banks could charge merchants for debit transactions, Bank of America responded by imposing a $5.00 per month fee on consumers. Then on 12/30/2011, Verizon announced it would charge $2.00 per transaction to those who opted to check their phone bill instead of taking Verizon’s historically faulty billing at face value and enrolling in their auto pay program. Another sample came last summer when Congress failed to extend the FAA tax. The price of airline tickets did not drop rather the airlines continued to collect the tax as added fare and pocketed the cash. It helped them meet their P&L goals.

Then there are corporate tax rates. Recently there have been a lot of politicians saying we will stimulate growth and jobs if we cut corporate tax rates. On the other hand there are those who want to raise them. A Fortune 500 Treasurer friend of mine said: “If they raise corporate tax rates, all that will do is increase consumer prices”. He is probably right. But what about lowering taxes? Is that really going to stimulate growth?

Let’s look at the facts, right now, the country is virtually paying banks to take its money in hope that it will lend and stimulate growth. The personal tax rates are at the lowest since 1990 when the top rate was 28% for those earning over $32K ($56.250 adjusted for inflation), currently it is 35% on those earning over $379K. If you make $32K, your rate is currently 15%, at the bottom of the top 10% of earners ($113K), 28%.

Capital gains rates on the other hand at 15% are the lowest since 1932 and it is doing nothing to stimulate the economy or jobs. In fact our low taxes on the top 5% of earners is doing nothing to stimulate the economy; why?

Maybe it’s because we keep giving raises to the top producers without pushing them to produce anymore.

Let’s think about it, our politicians think that if they rail against taxes and give tax breaks to their buddies, they will help them by creating jobs with the money they don’t pay. The problem with that is instead of forcing them to be more productive, we are giving them more money for doing the same job.

Hello!!!!, it doesn’t take a rocket scientist to figure out that if you are going to give someone more for doing the same or less, they are going to do the same or less. Perhaps we should take a lesson from business, and move the goal posts. If you want to make the same, produce more.

How does this fit into tax policy, especially Capital Gains? Simply stated, we as a people are lazy yet very inventive and creative. By rewarding people for passively investing at a low rate, we are redistributing wealth (Socialism) to those with the means as opposed to encouraging them to be inventive and develop new ways to produce jobs and capital.

They say “Necessity is the Mother of Invention” and if you used to netting $212,500 on $250,000 in Deferred Interest (Capital Gains), you would not let a 100% increase in tax rate let your net income drop below that $212,500 level. No, you would raise your gross to $303,500 by getting inventive and creative. Based on a 12 percent return, you would need to generate almost $450,000 in additional sales which would require between 2 to 4 additional employees to do. As a result, you may even take a higher risk investment, create or invest in a new company, to create jobs that produce the revenue and profit. But you are not going to create jobs out of some largess, especially when there is a risk to do so unless you need to maintain your comfort zones, your standard of living.

Perhaps this is why when we don’t set the bar high enough for top performers, we slip back economically. Politicians and Rupert Murdoch stir up the populist plot against high taxes and then demand future generations pay our bills.

Don’t get me wrong, I hate paying taxes too, but as part of the upper 10%, I am constantly striving to get back to my comfort zone in the upper 5%. As a result, I expect that this year I will be in a position to hire 5 people and hopefully have the privilege of paying taxes at a higher rate.

Note to my son

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Good morning Son,

You are now 20, with approximately four fifths of your life ahead of you. I want to share with you something I wish my father had been able to teach me directly.

You see, when I was young, we, the family and I, always were working against a deadline. There was no structure about what was most important to do; just that it all had to be done before the beginning of the season or before the garbage man came or before we opened in the morning. Everything was a rush job due right away. What I did not know, was that I was learning how to plan and prioritize and it was not until much later in life that I understood that “Time waits for no man”.

The facts are as follows:

  1. There are 168 hours in the week.
  2. With 8 hours of sleep per day, you use 56 of those hours per week.
  3. Assuming an hour per meal (21 per week) and you are down to 91
  4. Classes are 15 hours per week
  5. Travel to Work and Work, another 12, leaving 64
  6. Hockey Practice, Games & Travel, another 10
  7. Leaving a balance of 54 hours per week for primary job, studying.

Based on a 3 to 1 ratio of study to time spent in class, you still have 9 hours per week to experience the college lifestyle.

Here’s the rub, you get sidetracked easily. We all do. Get up at 10 am vs. 7 am, and you lose up to 21 hours per week. Get lost on YouTube, Netflix and Facebook, for 3 or 4 hours a day, another 21 to 28 hours per week (in my case it’s mindlessly watching television). Between those two, 25% of the week is shot. That equates to spending 25 years of your expected lifespan on a bender.

So here is the advice:

  1. State you goals.
    1. Keeping your Hope Scholarship
    2. Getting into Med School
    3. Having a few Bucks to Spend
    4. Playing Hockey for fun and camaraderie
    5. Having a good time at school
  2. Prioritize them.
  3. Determine how much time each takes
    1. Don’t forget Sleeping and Eating
  4. Plan your week accordingly
    1. Big Rocks First
      1. Class
      2. Study
      3. Hockey Practice
      4. Work
    2. Smaller Rocks next
      1. Sleeping
      2. Grooming
      3. Eating
    3. Gravel/Sand last
      1. Partying
      2. Entertainment
        1. Facebook
        2. Netflix
        3. Etc.

Move it around anyway you wish but make but make planning a priority.

What is really good about what you have in your life, is balance. There is your full time job; being a student and studying, your part time job; which gives you money and a social outlet, physical activity; Hockey, time for further intellectual stimulus; the Literary Society and time for friendships.

Now all you have to do is fit in the most important parts and stick to the schedule. Remember, as a Doctor, you will be required to schedule in 15 minute intervals. It you think this is tough, wait ’till then.

Love,

Dad