Taxes on ‘rich’ can kill your job

President Obama’s plan to hike taxes on people making more than $250,000 sounds perfectly sensible–if you’re paid wages and have never filled out a Schedule C. Your ignorance can cost your country a lot, and it can cost you or your neighbor his job.

Small businesses–the kind that employ fewer than 50 people–are the biggest employers in the country, with combined payrolls of 48.4 million people. Big companies (more than 500 employees) have 18.1 million on the payroll, and mid-size firms account for the balance of 42.5 million.

Overwhelmingly, small companies pay their income tax on the owner’s personal 1040. That way they escape double taxation, first as a corporation and then as individuals. So “the rich” include people like your pharmacist and the local deli, and the guy who works on your car.

Now suppose you are that pharmacist and your accountant tells you to set aside an additional $40,000 in estimated taxes to pay your higher tax bill. You have to make some choices. You can eliminate the family vacation and make some other lifestyle choices, and maybe that’s enough. More likely, though, cutting $40,000 from your budget goes too close to the bone. The alternative is either to eliminate an employee, or to cut other business costs, such as fringe benefits.

Idealists might actually imagine the typical businessperson would simply slash her family’s lifestyle, like taking the kids out of private colleges and sending them to State U. The profit-minded, however, do not think this way. Fringe benefits are the first things to be cut; even giant companies are slashing 401(k) contributions in this recession.

I was once a junior editor at a mid-size privately owned publisher. One of our papers announced layoffs, and when I was having a beer with its publisher, I remarked it was too bad he was losing money. Oh, my goodness no, he laughed. Gross margins have declined to 25 percent. We can’t tolerate that. Our target is 40 percent. That is, $40 of every $100 that newspaper generated went to the family that owned it. They wouldn’t take less than $25.

Admittedly, it’s harder for small companies to lay off workers than bigger ones. The most recent ADP survey finds that, in the 12 months ended July, large employers furloughed 5.7% of their workers, mid-size companies 5.8% and small companies only 4.4%. They are leaner to begin with.

Or maybe they have bigger hearts.

But probably not. When small companies see their costs raised, in the form of higher taxes, they aren’t going to do nothing. They’re going to cut other costs. On the company’s income statement, you and I are listed among those costs.