Dear Entrepreneurial Millennial Voter
To my millennials who are disrupting and innovating like BAWSES all up and through this country and abroad, may I rap-a-taste with you?
I observe you to be a very smart and savvy generation. You guys are killing it in the online business markets. Although I’m a bit older, I find myself an enthusiastic student and quiet subscriber to many of you.
That stated, I assume you guys know something of financial statements — income statements, profit and loss, and balance sheets.
I assume many of you are college graduates and some with backgrounds in STEM or corporate America.
If not a college graduate, then maybe you’ve taken your passion, artistic expressions, or other skill and offered them, freely, to the world — and bam! You discovered a market. And now, you’re a business owner — learning as you go.
Either way, as an aspiring entrepreneur, I totally relate to your experience. For, the person I’m talking to, here, is either an online entrepreneur, aspiring to be one (like me), or know someone who is.
If my assumptions are right, then, as an entrepreneur, I wonder if you are thinking about American tax policy in a way that is consistent with your real world experience vs. political theory. In a way that is consistent with basic arithmetic, accounting 101 and economics 101.
For, I’ve concluded that it is urgent entrepreneurs understand that any politician who emphasizes “taxing the rich” as the cornerstone of their economic policy, does not understand you, business, or, dare I say, America.
Ideas Have Consequences
Such an idea is an insult to the entrepreneurial spirit that has driven this nation since it’s founding. Such an idea misses the forest for the trees and is not a sustainable long-term economic solution — as evidenced by our steadily rising national debt and the pending bankruptcy of social security and medicare.
For currently, we have a progressive tax system that begs the question — just how effective is this “tax the rich-fair share” policy since our debt is steady rising?
Does America Have an Income Problem, a Spending Problem, or Both?
Do we have an income problem or a spending problem or both? Is taxing the rich the only way to fix it? What other solutions are on the table? And, do the American public (especially the millennial entrepreneur) even know other sound solutions even exist?
Before I tell you why it’s important you understand, clearly, a candidate’s tax ideology and how it, directly, affects your business and family, let me ask you some questions and give you some facts to verify.
Who Defines “Fair Share” and What Really is a “Fair Share?”
Did you know that 70 % of federal income taxes are paid by only 5% of rich Americans? Is that fair?
Did you know that it’s very misleading and, in some cases, disingenuous to compare a business owner’s income tax bill to their employee’s income tax bill and suggest unfairness? Remember President Obama’s suggestion that Warren Buffet’s secretary paid a higher tax rate than he did?
The truth is such a comparison is apples and oranges. The comparison is a recycling political tactic to persuade voters who are ignorant to the details of entrepreneurial life. So the answer to the question above — what is a fair share — is, there is no answer.
Right now, fair-share is whatever government bureaucrats and ideologues decide it is. And that my friends, is unfair. Now, consider a quick fact:
The federal government collected $1.54 trillion from individual income taxes in fiscal 2015, making it the national government’s single-biggest revenue source. (Other sources of federal revenue include corporate income taxes, the payroll taxes that fund Social Security and Medicare, excise taxes such as those on gasoline, cigarettes, estate taxes, customs duties and payments from the Federal Reserve.) Pew Research Center
Your Ignorance is a Politician’s Bliss
Politicians bank on the general public not understanding business operations, financials, and tax law. They want to make arguments that appeal, falsely, to morality so as to move you to vote emotionally instead of logically and factually. This is why these arguments are always made in the context of the “poor” and “middle class.”
But you, as a millennial entrepreneur, know the difference — right?
You had a rude awakening when your annual income first cleared north of six figures. Your lawyer or tax accountant demonstrated to you the difference between your income and your employees’ income.
If you are, still, doing your own taxes, then research has certainly taught you the difference after receiving your first tax bill.
If you don’t know the difference, then I’ll attempt a crash course. Taxes are unnecessarily complicated. And one of my hopes for you, after reading this post, is no one can ever fool or guilt you, again, about your success and income bracket.
Crash Course — Who Pays What Federal Tax?
First, understand we are talking about several sources that contribute to federal revenue.
- Individual income taxes. People here include employees — i.e., the working poor and the middle class as well as the self-employed. Taxes are taken out of the checks of the employee each pay period. While the self-employed are issued a 1099 which transfers the full 15% individual tax burden on to them as a self-employment tax.
- Corporate income taxes. People here include companies who make X dollars per year. Many people in this category are usually registered businesses as C, S, or LLC corporations.
- Payroll and self-employment taxes. Individual taxes flow out of payroll & 1099 reports. Payroll taxes are paid by employers, employees, and the self-employed. The rate is approximately 15%. If an employee, the payroll tax is split in half (7.5% ) between the employer and the employee (i.e., the employee’s individual rate). The employer’s share (i.e. corporation) is what enables employees to get unemployment benefits if laid-off or fired. If you are self-employed, then you pay the entire 15% of this as a “self-employment” tax (i.e., their individual tax). Employees know these taxes by their pay stub names— FICA, SSN, & Medicare. For, these taxes fund federal government, social security, and medicare. Social Security and Medicare funds were, allegedly, started with good intentions after the Great Depression. These depleting funds are now perceived, by many Americans, to be a government approved ponzi scheme. The elephant in the room, here, is two-thirds of the payroll tax is where the working poor and middle class are getting the rawest deal. For with the individual income tax, working Americans, through deductions and exemptions, can get their tax burden reduced, significantly — even down to a refund at the end of each year. But the payroll tax is an everlasting 7.5% to 15% of working American’s income every single pay period — forever. Hard earned money that is snatched to go into a fund that is widely reported to be going bankrupt. A problem few in either party appear to be moving with urgency to solve.
- Excise taxes. These taxes include estate, gas, cigarettes, custom duties and federal reserve bank payments to the government. Everyone in America pays these taxes if you use gasoline, smoke, travel, or use a bank. The estate tax is also known as the death tax. The government wants to tax you to death — literally. See your tax lawyers and accountants to ensure your legacy for your children and not the government coffers.
And we haven’t even added in state, local, and retail taxes.
Some Numbers
As you can see, a lot of what we’ve been lead to believe about who pays what in taxes and why is often inaccurate or mischaracterized. We’ve been conditioned, through political debate, to only think in terms of individual “income tax” burden.
But based on the above, to know our real tax burden, we need to ADD UP all the taxes that affect us, at any given time, to find our effectual tax rate. That is, the rate we pay across all collection channels.
Let’s take a stab at it with a North Carolina employee who makes 10.00 per hour. This person single or heading a family would be considered — working poor.
Gross bi-weekly pay: 775.00
FICA : 62.08 (8%)
Social Security: 48.05 (6%)
Medicare: 11.24 (1%)
Total Federal Payroll Taxes: $121. 37 (15%)
Total State Taxes: $28.00 (4%)
Total Fed + State = $121.37+ $28.00 = $149.37 (15% + 4%)
Net take home pay = $625.63
Employee’s Federal Individual Tax Rate =15%
ALL taxes from total income = 19% (149.37/775.00)
But that’s not all the tax you pay! We didn’t even factor in local taxes (if they apply) and all the retail taxes you pay each time you buy items from food to clothing.
Reality Check
So using this one North Carolina example, depending upon your state, you keep 81% of your income after the feds and state take their cut.
Then you take that net 81% and pay more taxes on it for things like gas, groceries, clothes, car registrations, and other retail purchases. Most retail taxes are around 6–10% depending upon where you live.
If you did the math on ALL the taxes you pay in a month on necessary purchases and added them to your monthly individual income tax burden— you would, likely, find well over 50% of your income going out in TAXES!
Politicians don’t want us counting our money so precisely.
And About Those Tax Refunds
Now likely at the end of the year, the person above would receive a refund check equal to what they paid FICA and friends during the year. They may even receive a bit more, if they claim dependents. As you know, tax refund season is a major life event for many Americans.
Everyone looks forward to refunds each year with excitement — believing it to be this huge benefit. However, the reality is this tax refund practice is, effectually, the government paying you back for an interest free loan you gave it each pay period.
And food for thought, how many Americans are receiving, monthly, interest free loans from the government? Is that fair?
Something to make you go ummmm…
So receiving a refund is NOT sound cash flow management. I will cover why in another post on my blog, lest I digress.
Now Think About It
An economic policy that primarily focuses on taking the earnings from the rich in order to satisfy an arbitrary “fair share” societal requirement is immoral. You don’t force another (through taxation) to give away what they earned to people who have not earned. Outside of government, that is called theft. Second, it is paternalistic. You determine your earning potential NOT the government. Lastly, it’s ineffective and unfair to the rich. Just because you are wealthy, you should not be demonized and punished. We are already taxing the rich above a fair share — and we are still in debt.
With those stakes, I wonder how a millennial entrepreneur could entertain voting for anyone who wants to raise taxes on the rich? I mean, correct me if I’m wrong, but aren’t you an entrepreneur (or trying to be one) because you want to be rich?
Okay — well-off for those who have been socially conditioned to feel like rich is a dirty word and being rich, automatically, makes you morally bankrupt. :)
Remember Shark Tank
Furthermore, since when are entrepreneurs okay with giving 20%, 30%, 40%, 50% or more of their income to someone who is NOT an investor in their company?
We’ve all seen the faces of entrepreneurs on Shark Tank who cringe at the thought of giving up more than 10% equity to an investor who can, actually, help them improve the profitability of their business.
Why on earth would we NOT vigorously question or push back on any politician (R or D) who dare suggest we just give them such a lion’s share of our profitability? Profitability our hard work earns us. Profitability they would take and give us nothing in return. Part Two Recommended Podcast.
