Matt’s Musings

Surviving Microeconomics: What Your Landscaper Hasn’t Told You

Posted on November 13th, 2008 by Matthew C. Keegan

Mention the word “economics” to most any group of people and your words will be met by a glassy eyed stare from the vast majority in that crowd. Add prefixes such as “macro” or “micro” to economics and you’ll put everyone but the most ardent business analyst to sleep. When it comes to understanding the workings of the economy whether collectively (macro) or individually (micro) most Americans would prefer to discuss the weather.

tax forms I’ve been doing my darndest to focus on other matters lately besides the election. Barack Obama won, he will be our country’s 44th president, and he has his work cut out for him.

Barack Obama, 44th President

If President-elect Obama were to fail, we would fail — there isn’t any other way to look at it. I just wish that those citizens who deliciously imagined the worst happening to our 43rd president, George W. Bush, understood what the devastation of presidential failure would look like. Maybe with the shoe on the other foot people will begin to realize the difficulty of managing the most powerful nation in the world.

But, I’m moving beyond politics at least as much as I can without having to remind myself that whatever decisions come down from Washington, DC over the coming months will most certainly impact my way of life. Indeed, my chief concern at the moment rests with tax policy and how taxation can impact businesses, big and small.

Raising Taxes On The Rich

We all know that the president-elect has said that he plans to raise taxes on individuals earning $250,000 or more. Those individuals include small businesses which may have several employees, skewering the notion that only “the rich” will be taxed.

True, if you pull in more than $250,000 annually, on the surface you look as if you are doing quite well. However, your share of the business income is probably a lot less, maybe just $50-75,000. After all, you must pay rent, utilities, state and local privilege licenses, taxes, payroll, accountant fees, and other operating costs. Many small business operators will tell you that they take the minimal amount of money out for themselves, choosing to plow as much money back into their businesses. Many business owners expect to pass their operations to their children or sell them and live on the proceeds when retired.

Bob, the Small Business Operator

A friend of mine, Sue, mentioned that her landscaper is probably part of the group of small businesses making at least $250,000 per year. These days many homeowners hire landscape firms to take care of their property as they want to spend whatever down time that they have with their families. Indeed, if they aren’t executives who are traveling across the country, even the around the world, they’re probably the owner of a small business working 60, 70, even 80 hours or more per week. Landscape businesses have been booming for the last two decades, business entities that barely made their mark previously.

Sue understood the impact that a tax increase would have on someone like her landscaper. Most likely, her landscaper would try to pass his increased costs onto his customers, but in a tight market he may not be able to raise prices. Instead, Bob the Small Business Operator could decide to do without one employee, forcing Bob to pick up the slack in order to hold costs down. With the proposed tax scenario, the federal government would extract more money from Bob, but it won’t be able to do that without it costing someone else: customers will either have to pay more for his services or an employee might be let go. Maybe both.

Six Years and Counting

I understand what small businesses go through as I have been running my own operation for the past six years. When I was laid off from my technical writing position in the business aviation field in November 2002, I immediately filed papers with the state to launch a business, obtaining my Employer Identification Number from the Internal Revenue Service in the process. Since then, I’ve kept my business registered as I moved from one state to another, maintaining privilege licenses, filing state corporation returns, and paying whatever taxes are due.

I’ve had the opportunity to expand my business which would have required me to hire workers, but have chosen not to take that route. Managing people takes away from what I love to do — write — plus it puts the burden of meeting and paying payroll squarely on my shoulders. Quite easily I could expand my operation to where it would pull in $250,000 or more per year, but I’m just not going to do that. With the coming tax hike for individuals (and small businesses) I’d be giving myself one more area of concern.

Expiring Bush Tax Cuts

If I haven’t lost you yet or if your sympathy for the small business operator is still zilch, let me give to you a very good and selfish reason why you should be concerned about taxation. Before I go there, I admit that you might see some sort of relief from the federal government next year in the form of a rebate check. Those monies will likely be added to our national debt even as the federal government raises taxes on higher income folks. But, come 2010 you’ll likely see that many of the Bush tax cuts enacted in the early part of this decade will be allowed to expire, tax cuts which trimmed the estate tax (repealed as of 2009) while lowering the highest tax bracket from 39.6% to 35%.

The Bush tax cuts also lowered the tax level for tens of millions of middle class Americans to 10% (from 15%), doubled the child tax credit to $1000, and reduced the penalty on married couples filing jointly. Those tax credits are set to expire and they will be allowed to expire especially if our current economic climate remains dismal. This means that you’ll pay higher taxes as will every other American.

Some are contending that taxes should be raised as that would bring in additional revenue for the federal government. Revenue is a fancy name for taxes — the government actually earns a big fat zero as it can only “make money” by extracting funds from taxpayers — but there is no correlation between decreased revenue and reduced taxation. In fact, over the past several years tax revenue has increased as businesses and individuals were freed up to make more money which in turn is taxed by the government.

Too Much Federal Spending

What most of us can agree on is that the Bush Administration spent money with reckless abandon these past few years with the full complicity of Congress. The federal government not only had more money to spend, they spent well above that amount. Our next president plans to increase spending sharply even as our involvement in Iraq dies down.

The ten billion dollars per month spent on Iraq will still be spent elsewhere; if Obama’s other social initiatives kick in, i.e. universal health care, educational reform, assistance for homeowners, tax incentives to keep businesses from fleeing overseas with their jobs, etc., those “war savings” will quickly disappear and be replaced and dwarfed by increased federal spending which will add to our deficit.

The Great Unknown

As I write this, Barack Obama is digesting the task that lays before him. Now that the campaign rhetoric has resided, he has to look at several issues, some of which will have to be addressed as soon as he takes office, even sooner.

General Motors and the entire U.S. auto industry may soon collapse, a fact that GM has been making known for the past few days. The company has cut back on advertising, postponed product introduction, canceled an all-important press conference at the Los Angeles Auto Show and has said that they need government help before 2008 ends.

The credit markets are still frozen for all consumers except for those who have very good credit, making it difficult for GM and others to borrow money and for their customers to finance new cars. Indeed, a few months back, GMAC (the financing arm of GM) stopped leases as the lender was losing its shirt. Today, customers must have a credit score of 700 or better to qualify for a loan and with the market being as tough as it is, the number of car shoppers has dropped considerably.

We’ve also learned that AIG has gotten a nifty $150 billion as part of their bail out, that several large banks have been given aid to help keep their operations afloat, and that a handful of other banks and financial institutions are also clamoring for funds. Just yesterday AmEx (American Express) joined the chorus and is asking the government for $3.6 billion in loan money — at some point the well has to run dry.

Few consumers, indeed not too many financial analysts seem to have a full grasp of just how difficult the next few months will be, especially if the federal government doesn’t take some sort of action to help the “macro” side of the economy. Sure, talking about middle class tax relief sounds nice (I’m all for it provided the feds don’t swipe from Peter to pay Paul) but that topic becomes moot if federal revenue is diverted to prop up failing corporations.

I’m not saying that government intervention is wrong, rather it cannot be done while hammering small businesses. In this case one segment of the business world (big businesses) gets help while another segment (small businesses) is forced to shoulder the load. 70% of all jobs created are from small businesses — dare we ask them to do the heavy lifting during these difficult times?

A Time to Talk and a Time to Act

I know that I’ve gone on for much longer than what I intended to, but I don’t want readers to miss out on the importance of what is coming our way. Even if lower income people were to receive financial relief from the federal government, that assistance could come at a price: the seasonal landscaping job, secretarial position, or assembly line opportunity could be lost thanks to a heavier burden placed on small businesses. Remember: tight credit has made it difficult for everyone to borrow money no less so for small businesses whose credit lines are already maxed out.

Helping out those in need is fine, but giving relief to bankrupt corporations and low income Americans while raising taxes on small businesses is a recipe for disaster. Tread lightly, Mr. Obama, because the decisions you make over the coming months can have a profound effect on country for decades to come. I may not have voted for you, but I am pulling for you — I just hope that that the change you are considering bringing is something we can truly believe in.