Pushed to edge of ‘fiscal cliff,’ small business owners worry about potential tax increase for high earners

By Shira Schoenberg | MassLive.com | November 28, 2012

Joshua Golden is not going to be devastated by a tax increase. But he is reconsidering buying a new condominium in Boston. He is holding off on hiring new agents for his real estate business. He wonders if he will have less money to spend on marketing, advertising and business expansion.

Golden, 38, owns Luxury Residential Group, a Boston real estate firm that represents clients looking to buy or rent luxury condominiums in Boston and the surrounding suburbs. He makes more than $250,000 a year, which means his taxes could increase under Democratic President Barack Obama’s budget proposals.

“Because of the uncertainty about how much my taxes are going to go up, I don’t know how to budget for the next 12 to 24 months,” Golden said.

What to do about tax rates for the wealthy is one of the central disputes between Obama and congressional Republicans as they struggle to reach a compromise on avoiding the “fiscal cliff,” a mix of tax hikes and spending cuts scheduled to go into effect at the end of the year. The uncertainty has generated concern among business people who say the proposed tax increase could affect their business decisions, in addition to their own income.

Obama’s tax proposal, laid out in his 2013 budget proposal, would raise an additional $849 billion over 10 years by not extending the 2001 and 2003 tax cuts implemented under President George W. Bush for high income taxpayers, according to an analysis by the non-partisan Tax Policy Center. This includes raising the tax rate on the top two income brackets, from 33 percent to 36 percent and from 35 percent to 39.6 percent. (That would impact individuals making more than $200,000 and couples making more than $250,000 a year.) It also includes raising the tax rates on capital gains and dividends to 20 percent and limiting deductions and exemptions for high income earners.

Republicans want to extend the Bush tax cuts for everyone, including those making more than $250,000 a year. They oppose raising rates, though they are open to reducing some deductions or tax credits.

Barry Bluestone, a professor of political economy at Northeastern University and director of the Kitty and Michael Dukakis Center for Urban and Regional Policy, said although he and his wife earn more than $250,000 a year, he would not mind the higher taxes. In fact, he has suggested raising taxes even more for the top earners.

“We are fortunate that our family is, because of two full-time earners, wealthy enough to have to pay additional taxes. To stimulate the economy, I don’t mind doing that,” Bluestone said.

Bluestone said what businesses need today are more consumers. And while the wealthy tend to save any additional money they make, those who are poorer tend to spend it. In a blog he writes for Boston.com, Bluestone argued that Obama should raise the tax rate on the top 5 percent of earners and give half that money to those in the lowest income brackets to boost consumer spending.

“When we need lots of money for investment, it’s good to have savers,” Bluestone said in an interview. “But right now…investment’s not the problem. What (businesses) are waiting for to make those investments is a surge in consumption.”

The Associated Industries of Massachusetts, a trade group that represents Massachusetts businesses, has not taken a position on the extension of the Bush tax cuts for specific income brackets. But Christopher Geehern, executive vice president for marketing and communication, said the group has urged caution regarding the potential impact of increases in personal income tax rates on the small businesses that pay individual rather than corporate tax rates.

“Sudden shifts in the current tax structure carry significant peril for subchapter-S corporations and other small businesses already struggling with an uncertain global economy,” Geehern wrote in an email to The Republican/MassLive.com. A subchapter-S corporation does not pay the corporate tax rate. Instead, profits flow through the company to its shareholders, who pay personal income tax on the profits.

Kate Putnam, president of Package Machinery in West Springfield, which machine wraps products for manufacturers, said the proposed tax increase would be unfair to shareholders of subchapter-S corporations like hers. Putnam said the profits from her company will push her income tax rate into the 36 to 39 percent range, even though she is not paying that money to herself but is reinvesting it in the business.

“We’re paying taxes now, and we won’t receive the benefit of the money for years to come,” she said.

Putnam said it is unfair that people who have unearned income, or hedge fund managers who take advantage of a lower tax rate on profits classified as “carried interest,” pay a lower tax rate. “As a shareholder of an S-corporation and employee, I’m getting the short end of the stick no matter how you slice it,” she said. “I think we’re all going to be stuck paying higher taxes and I’m not adverse to it, but I’d like to see an equitable distribution of those taxes.”

Similarly, Carol Campbell, president and CEO of Chicopee Industrial Contractors, which installs and moves machinery for manufacturing companies, said, “My hair gets up on the back of my neck when I hear everybody thrown into the same barrel or bucket.” Campbell said she does not qualify as a high income earner now, but the profits from her business could push her into the higher income bracket. “If there isn’t a profit then there isn’t a business,” she said.

Campell said the proposal to increase taxes on high earners is only one of her concerns about the fiscal cliff discussions, in addition to questions about the continuation of a tax credit that accelerates depreciation and a potential change in the payroll tax. Campell said her business is just emerging from the recession and she is making year-end decisions while facing the tax uncertainty. “I am being backed into making decisions based on the tax ramification, which is not the way I like to do business,” she said.

Dennis Lane, president of the New England 7-Eleven Franchise Owners Association and the owner of a Quincy 7-Eleven, said he does not earn $250,000 a year, but he knows many business people who do. “I think there’s a myth out there that folks that do really well haven’t earned it,” he said. “I know a lot of people who started out small and persevered and worked seven days a week and grew their business.”

Lane said small business owners often invest their own money into their business. “If the rate that I’m taxed increases and it obviously reduces my amount of disposable income, it reduces not only the amount of money I can invest in my business or (to) open a new business, it also reduces the amount of money I can invest in the community, for everything from buying a car, buying a big screen TV, getting braces for someone’s children,” he said.

“I do think the people who are larger wage earners are also larger contributors to the community.”

MyNEUFind Faculty & StaffFind A-ZEmergency InformationSearch

360 Huntington Ave., Boston, Massachusetts 02115 • 617.373.2000 • TTY 617.373.3768
© 2013 Northeastern University