Entrepreneurs and Government

I think a majority of small business owners and entrepreneurs are skeptical about government and taxes for a variety of reasons.  Large companies tend to shelter their workers from the vagaries of changing and hostile government regulation, but there is no such shield for people who own their own business.  At tax time this year, I had two thoughts about small business owners and taxes:

1.  We see the cost of taxes directly.  This year my taxes were X higher than I expected, where X is a pretty large five figure number (pretty large for me, at least).  To pay off X, I took the money directly out of an order we were placing for capital investment and new equipment, reducing the order by X.  At our company this year, there was a one-to-one scavenging of capital investment by taxes.

2.  Unlike most workers, entrepreneurs actually write checks for their tax bill rather than have it deducted stealthily from their paycheck.  I have always thought that this was the true purpose of withholding -- not compliance, but to try to hide people's tax bill from them.  If everyone wrote a check  (or four quarterly checks) each year for their tax bill (as I do), there would almost certainly have been a tax revolt years ago.


  1. JoshK:

    I've always thought that if there was one issue that the GOP should push it would be to end payroll withholding. There would be no healthcare debate whatsoever b/c people would simply refuse to pay.

  2. Dan:

    Having always worked for a corporation, with my taxes automatically deducted, I think you make an interesting observation that makes a lot of sense. I recently received a five-figure annual bonus from my company, and was amazed at how much of it got shaved off by taxes (around 35%). Of course, I knew I was in this bracket, but seeing it on that one check really made it more clear to me.

  3. Henry Bowman:

    As I recall, income tax withholding was an idea due to Milton Friedman during World War II, as the government needed money immediately and couldn't wait until the tax filing date. Later in life he is reputed to say it was one of his worst mistakes.

  4. StanO:

    For years I have advocated the idea of having our taxes due 1 week before national elections, and being required to pay the entire amount by check. Lots of luck getting that past the pols.

  5. J Howe:

    This time of year I'm always disappointed to hear that people are happy about the size of their tax refund. Getting a refund should not be a happy occurrence. It would be wonderful if the withholding tax could be repealed, or at least converted to a quarterly payment. At least that way, the 50% of the population that actually pays taxes would get a better sense for what they are really paying.

  6. Jeff:

    I think the most ridiculous part of income tax withholding is the underpayent penalty. Not only does the Federal government require you to give them an interest free loan, if you don't loan them enough money, they penalize you for it.

    Between the rent seeking, dead weight loss, and distortion, the whole system needs to be scrapped.

  7. ed:

    Even worse, employed people never see at all the so-called "employer share" of social security and medicare taxes. Only the self employed realize that we are all paying around %15. At least people see their total "income tax" bill at the end of the year when they file their taxes. People may not be aware of the extra social security taxes at all, or they may believe the fiction that somehow the tax burden falls on their employer simply because it is labeled "employer share," (never mind that the employer writes the check for both amounts).

    If this "employer share" fiction were ended I think there might be a revolt against social security as well.

  8. marco73:

    One thing that drove me back into corporate America's arms was the mind numbing paperwork drill when I was a 1 man consultant. Back before Y2K, all the crazy IT guys were consultants, raking in the "big bucks". I spent 18 months receiving checks for my work, and sending off checks to all sorts of government entities who wanted their cut. If every America had to write their own checks for every payroll related tax that employers now handle through withholding, noncompliance would starve government into shutdown within 1 month.

  9. Vootie:

    > there would almost certainly have been a tax revolt years ago.

    Indeed. Modern total taxation runs something in excess of fifty percent, when you total up the state, federal, and local taxes and "fees" and "licensure requirements".

    Schools teach about The American Revolution. In a few classes, they may mention in passing, that one of the primary causes of the war was taxation ("Class: The term 'Taxation Without Representation' may appear on the test. Now, onto the next subject. No, Timmy, you don't need to know what it means..."). The chances of them mentioning that the total taxes in question were 2-3% will be mentioned is a number mathematically indistinguishable from zero.

  10. Tim:

    Scrap income taxes. Go for a visible VAT instead. Everyone pays and they are reminded each time they go to the store.

  11. Dr. T:

    Switching to a VAT doesn't help. My daughter lives in Germany where the VAT is 19% (and they still have an income tax!), but Deutschlanders rarely complain because they are addicted to their nanny-state government. I live in Tennessee with no income tax but the highest sales tax in the nation: 9.25%. Some Tennesseans gripe about the tax, but they don't want to slash state government spending, and they keep re-electing those who promise more government goodies.

    The problem is not the types of taxes. The real problem is that many people LIKE big governments because their government benefits exceed their taxes. It's an unethical but logical stance to vote for politicians who will increase your government-derived benefits while putting most of the tax burden on others. That's what two generations of "greedy geezers" have done regarding Social Security and Medicare benefits. That's what the middle class did with mortgage interest deduction, college education deductions, FHA loans, etc. Given the nature of people, I see no end to such self-serving behaviors.

  12. DMac:

    The witholding is both a visibility issue (or cloaking device), and a cash flow issue for the treasury. I'd prefer a flat 15%-20% on everything over some base level, say $50,000 for a household, paid quarterly (not withheld). When Washington feels the need to raise revenues, they need to ask us to write larger checks, not slip in nearly invisible rate chages, in multiple brackets, that many don't notice. The pushback would be real, and widespread. I've never understood the joy of getting a big 'refund' of my own money. My annual goal is to need to write a (modest)check as I file my return, just under the penalty cutoff.

  13. Doug:

    I'm so old (a geezer story to follow) ... that I still remember my late father having a fit when California starting withholding income taxes, some time in the early 60s, I believe. He saw it exactly for what it was: a way to hide the full burden of your taxes. Dad was a simple man, but he knew a con when he saw one!

    @Dr. T: Sorry to burst your bubble, but you are not alone. In the Bay Area (CA) we also have a 9.25% sales tax rate. I now do all I can to starve the beast. I bought my 65" flat panel TV through Amazon and saved $252 in state taxes. Free freight, too! Hell, just yesterday I ordered socks and deodorant through Amazon and denied the bastards another $7. Every little bit helps.

    @JHowe: I think the "joy of a refund" is going to take a cold shower once this new Obamacare program is enforced. The poor people who so much enjoy their refunds will find that they ain't getting them this time because the IRS will now "deduct" (government-speak for "steal") their mandatory Obamacare premiums from said refunds. Let's see how that goes over this time next year: payments, but no services for 4 years.

  14. me:

    @Dr. T

    Speaking as a former Deutschlander, as much as I couldn't bear to deal with the more German aspect of administration (try to show up in the local offices during their weekly Wedneday 10-12pm and 12-1pm public opening hours... obviously civil service targeted at people who don't work?), I pay about the same total percentage in taxes here that I paid there. The only difference is that here, I get a war in some foreign country for my money, whereas I got pretty decent benefits in Germany. Much as I dislike the Nannystate, the bleed-you-dry-just-because-we-can state isn't really all that much better.

    Additionally, foreigners in Germany get to vote in local elections. I am paying taxes through my nose in the US - all without representation. Yeah, right.

    I wish the government would just send me a check each year, with my share of the cost of running this country called out per line items, with the provision that I'd get to cross out all the nonsense I didn't benefit from and didn't vote for.

  15. Bryan:

    @Dr. T

    Where in Tennessee are you? I'm from the state myself.

  16. Tim:

    The worst thing that can happen to a democracy is a situation where the majority of people pay no tax because their income is too low. i.e. representation without taxation. A VAT with an across the board income tax would help reverse that trend. It won't solve all problems but it would be better than now.

  17. Mary:

    Sorry, Dr. T. but the dubious distinction of the highest sales tax in the country falls to we who live in Cook County (Chicago) where our sales tax is 10.25%. We also pay a state income tax and numerous other taxes (amusement, hotel, restaurant, etc).

    Those of us close enough to travel to surrounding counties where the tax is somewhat lower do so for larger purchases.

    I have always felt that the withholding tax was just a way to disguise how much is paid. The same is true for Medicare and Social Security. Breaking down costs to the smallest possible time increment is a financial trick used by not only government, but corporations. (I'm thinking about cellular telephone bills here and how most folks don't understand that those "free" or low cost phones are not really free or cheap.) Overpaying for anything doesn't sound so bad that way!

  18. Jim:

    Today is the day to run a survey. Ask 10 people how they did on their taxes. I'll bet 80% will make a reference to the amount of their REFUND and no mention of the amount they PAID.

  19. perlhaqr:

    Stan: That's what I've been saying for years. Kill withholding, move tax day to October 25th, and see where things go from there.

  20. caseyboy:

    What a great topic for "Tax Day". Wage garnishment for taxes just adds insult to the injury incurred from a far too complex tax code. Billions upon billions of dollars spent annually in an attempt to comply with filing requirements. And even with the best of intentions achieving full compliance can be a hit or miss proposition. I am a proponent of any tax system that simplifies the process and causes everyone who has a vote to become a true taxpayer. Flat tax, fair tax, VAT, national sales tax, I could get behind any of them.

  21. Michael:

    I know Dr.T dis-likes me because I avoid taxes. I use the tax system against itself. Anyway, brief story.

    I wasn't around when my mom called her plumber. All he did was move the hot water expansion tank from the hot line to the cold line and the bill was $225. We got to talk about costs. He's a 100% licensed plumber he told me where his costs go.

    In Ohio, if you want to get permits for work on residential homes, you have to be a commercial licensed worker. Basically, if you want to change a faucet for someone, you need to know how to plumb a skyscraper.

    We both make the same amount of take home pay. He just has to bribe government and unions and pay endless fees to do what I do off books.

    And I don't feel guilty. The sooner the people of this country force cities and states in to bankruptcy, the better. No government in this country is going to be fiscally responsible, except for townships, for which I'm leading people here in Ohio how to get out of government corporations.

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