No, Class Warfare WILL Create Jobs!

A number of people are talking about the spectacle of Representative John Fleming complaining about tax cuts on the wealthy him, suggesting that it will lead him to cut jobs. [my transcription]

Chris Jansing: With all due respect, Congressman, the WSJ estimated that your businesses, which I believe are a [sic] Subway sandwich shops and UPS stores–very successful–brought you last year over $6 million dollars.

Fleming: Yeah, that’s before you pay 500 employees, you pay rent, you pay equipment, and food. Ah, the actual net income of that was only a mere fraction of that amount.

Jansing: So you’re saying that if you have to pay more in taxes, you would have to get rid of some of those employees? These are not as successful businesses–

Fleming: I would say that since my net income–and again, that’s the individual rate that I told you about–the amount that I have to reinvest in my business and feed my family is more like $600,000 of that $6.3 million. And so by the time I feed my family, I have only $400,000 left over to invest in new locations, upgrade my locations, buy more equipment.

Now, aside from the point that Laura Clawson makes–which is that even if most of his costs are wages, then he’s only paying each of those claimed 500 employees $11,400 a year, and aside from the point that Sam Seder makes–which is that this $600,000 is on top of the $174,000 he makes as a Member of Congress (which of course also means he doesn’t have to pay for his own health care), Fleming is blowing smoke about how business owners are taxed.

They’re taxed after all business investments are deducted, not before.

That is, assuming Fleming isn’t paying himself a wage (it doesn’t sound that way given the way he mixes his reinvestment and “feed the family” amounts), then what happens is he reinvests $400,000 of his net profits, and then takes what is left over, $200,000, which is what he’d be taxed on. Say he paid an effective tax rate of 32% on that, so $64,000.

Under Obama’s plan, Fleming would:

  • Pay the tax rate he would have paid in 2001–effectively about 35%
  • Lose some deductions (only because of his Congressional salary though–without it, what he claims is his take home pay would not be high enough to hit the $250,000 income level at which those deductions are removed)

So say he paid 35% (he also might lose what I presume is a deduction for a second home in DC). That would mean he’d pay taxes of $70,000.

His poor family! Having to eat off of just 2.6 times the median pre-tax income of $49,445 in this country (not counting the Congressional salary, of course).

Lucky for Fleming, there is a way he can keep paying the same amount in taxes. If he reinvested $417,142 rather than $400,000 in his business, then he’d still pay the same $64,000. Sure, his family would really suffer, living off of just 2.4X the median pre-tax income (still ignoring the Congressional salary). [Update: As Mary points out, I’ve oversimplified this–100% of the investments aren’t deductible in the first year.]

But since he seems to be making a 10% return on his business, that’s not actually a bad idea–it’s as good an investment as you’re going to find in this day and age.

And the best part? Given the shitty wages he apparently pays his employees, the extra $17,142 he invests back in his businesses would more than … create a job!

30 replies
  1. scribe says:

    I’ll bet he feeds the family Subway, then deducts it as a business expense for product testing or market research expenses. Or better yet, buys the family food through the Subway, but that food doesn’t have to be Subway food – it could be filet mignon, for all we know – and still pays for it through the Subway and still deducts it as a business expense.

  2. scribe says:

    @scribe: Which, of course, is priced at wholesale.

    And the poor schlubs he’s paying minimum wage both have to pay retail and would lose their craptacular jobs if they were to take a slice of pickle for themselves.

  3. emptywheel says:

    @scribe: The other thing to remember about this is he represents Shreveport, LA, not Beverly Hills or NYC or Boston.

    It’s sort of cheap to live there.

    Also, his kids are between 21 and 31. So while he may be paying a couple of tuitions, it’s not like he’s got to feed ALL his family with that $200,000.

  4. Mary says:

    “That is, assuming Fleming isn’t paying himself a wage (it doesn’t sound that way given the way he mixes his reinvestment and “feed the family” amounts), then what happens is he reinvests $400,000 of his net profits, and then takes what is left over, $200,000, which is what he’d be taxed on.”

    I agree with the heart of the point being made, but this computation is off. If he’s investing 400,000 in new locations, equipment, etc (if – he says it leaves him that much to do that, but not that this is what he’s actually doing) he’s investing in depreciable assets. You don’t get a full, current year, write off for that. We have had some “stimulus” based accelerated write offs, but basically if he’s in an ownership program for that investment (as opposed to leasing) then he’ll only get a portion of the investment as a write off in the year of investment.

    OTOH, he probaly has a larger cash flow than the 600,000 he mentions, since he is taking prior years investments’ depreciation now.

    Also, fwiw, most subways that I know of have a large # of part time workers.

    Anyway – the real argument that gets made in general is that if you reduce down the “take home” to the owner, instead of investing that 400,000 they’ll take it and … horde it. Instead of reinvesting it. Because, since he’s making 10% or so, after tax, with all the business bennies and write offs (company cars, HSAs, 401Ks, company paid for “shareholder meetings” in Florida in January, company paid for phones, computers,e tc.) it would be so much more attractive to get one of those 1 & 1/2 per cent CDs.

    Anyway – when you have someone working their butt off to run a company, at some point a high enough tax rate (we’re not nearly there) is a disincentive – but when you have someone who is so hands off on running the business (which he has to be – bc he can’t be working full time for his constituents and full time running his business) it doesn’t have the same impact. fwiw.

  5. earlofhuntingdon says:

    This sort of blind, unaware, selfish ruthlessness isn’t up to the standards of Gilded Age excesses, but we’re gaining speed and ought to surpass them soon.

    The idea that $250K, gross, let alone net take-home, is a hardship income is tripe, but that’s the sort of thing an employer like this expect his employees to eat. Rather like the aging lord who asked Rumpole – a n’er do well barrister of good schooling, great argumentative gifts, and modest legal aid income – in all seriousness whether he could get his [non-existent] gamekeepers to eat rook (similar to crow). “In my day, gamekeepers pretty well lived on rook.” And they tipped their forelocks, said “by your leave”, and lived on a pittance, in fear of being dismissed on a whim without reference, home, food, job, pension or welfare.

    The good ol’ days, then as now, were good for very few people, barring the middle class heydays of 1945-80. That oasis of economic fairness came about after nearly a century of hard slogging, harder repression and activism.

  6. earlofhuntingdon says:

    The “feed the family” phrase must have come to this guy from some yuppie marketeer, who thought the sentiment would disguise the absurdity of claiming a nuclear family needs nearly $35,000 a week, %5,000 a day, for wonder bread and peanut butter. He would have been better off with, “Let them eat cake,” and just said he worked hard for his money and expected to keep it and use it as he saw fit rather than give it to an inefficient government that would only give the biggest chunk of it to its military-intelligence complex.

  7. earlofhuntingdon says:

    “Small businesses” that are this profitable are no longer “small”, and no longer what keeps the wolf from the door or the family out of Chapter 11. Only a fraudster or a highly successful business would generate that kind of free cash for the owner to spend at his leisure. If the business is that successful, it generates greater income that should be taxed, the same way professional service or investment income should be taxed when an individual accumulates more than $250K/year.

    It’s the income that should be taxed. How it’s made should be irrelevant, which means that passive investment income ought to be taxed at the same rate as “earned” income. That it doesn’t is a stick in the eye to every person who works for a living, from a DC lawyer to an Estes Park bricklayer to a San Diego fisherman. As for hedge fund billionaires, the mind boggles. Imagine the rate of return from spending even $10-20 million on lobbying DC if it saves $500 million in tax.

  8. earlofhuntingdon says:

    @emptywheel: Then he has CEO-syndrome. It’s the belief that he’s an ordinary middle class gent who has a right to complain because the millions he “earns” and the hundreds of thousands in his benefits that he has his company pay for aren’t really worth as much as the SEC disclosure statements say they are because “They’re not all cash” and he only takes home their after-tax value. That is, the actual tax paid after his company-paid tax and benefits lawyers, advisers and outside consultants devise ways for him not to pay as much tax as he should on that income. I’ve been with more than one CEO and SVP who has said that with a straight face – several times while flying in the company jet.

  9. scribe says:

    @earlofhuntingdon: I’d love to hear the CEO types, if they were ever so confronted, spin their logic on how their 10k-a-day courtesans are justified because the benefits the CEOs derive “aren’t in cash”.

  10. MadDog says:

    “Class warfare” is the new Repug attack buzzword. It’s getting repeated everywhere in the MSM.

    I always find it peculiarly odd that the MSM never seems to remark on the fact that the Repugs always accuse others of what they themselves are guilty of.

    Repugs have been conducting “class warfare” for decades.

    “Class warfare” in support of the permanent ruling overclass of MOTU billionaires, millionaires, and other sundry robber barons.

    “Class warfare” against the poor, the minorities, and the middle class.

    “Class warfare” against unions, teachers, scientists, and government workers.

    The outrage that Repugs express today with their charges of “Class warfare” are only outweighed by depth of their beliefs in their own lies.

  11. scribe says:

    @emptywheel: well, to give credit where credit is due, he did build up a couple businesses and that does take some level of smarts. But the sense of entitlement he evinces is, well, it’s right up there with the daughter of the Wal-mart executive a few years back who paid her first-kid-in-the-family-to-go-to-college roommate a substantial sum to do her class work, too, so she could go clubbing in LA and to the beach in Malibu instead of worrying about classwork. It didn’t come out until the parents donated a gym or building named after the daughter and the roommate came forward (she’d lost her financial aid, too, and was going to have to drop out of school).

  12. MadDog says:

    Totally OT – Computerworld has this piece up today:

    3,000 Intelligence officials’ names, emails leaked as ‘INSA spies’

    Last week, a “premier intelligence and national security organization” was hacked and then hundreds of intelligence officials, ranging from the NSA, FBI, CIA, the Pentagon, the White House, had their names, email addresses, some phone numbers and even home addresses posted on Cryptome…”

    The 614 page PDF from Cryptome is here.

  13. Mary says:

    I do think you need to adjust the example for the fact that the 400,000 would not be 100% deductible in the current tax year if reinvested in building and equip.

    I was going to mention adding in the info re: effective v. marginal rate, but it sounds as if he has income from enough other sources that effective is the way to go.

  14. earlofhuntingdon says:

    @scribe: My int’l travels notwithstanding, I missed the courtesans. I was privy to comments where officers talked about themselves as “little guys” who worked for a living, despite being top dogs.

  15. Mary says:

    @William Ockham: That is pretty interesting.

    For one thing, on it, he only lists 50-100,000 as his net from the Subways. However you treat the 400,00 – there’s a disconnect between the 50-100,000 and hte 200,000 he “feeds his family on.” He also gives a “value” of the asset (separate from his income) of only 50-100,000 as well. Any thoughts on whether or not in the free market model he’d really sell that chain for only 50-100,000 when it spins out that amount (even using his unreliable numbers) as income for one year? Go find a business valuation expert who uses 1 x current year’s earnings to value a business.

    The Park City Health has odd valuation numbers as well, even factoring in that supposedly he had a bump in earnings by virtue of being an employee. Some odd numbers.

    One further btw – it looks as if he has mostly sub-s and LLC entities, and, unless some unusual elections were made (or not made in the sub-s situation) it doesn’t matter much (other than for FICA etc. purposes) what he did or didn’t take out as a “salary” since it is all bypass entity – flow through income.

  16. emptywheel says:

    @Mary: Thanks-noted your point, but I didn’t redo the math. I think we’re dealing w/funny numbers anyway, as it defies understanding how he’s paying 500 employees out of $5.4M, particularly since one of his businesses–the one he doesn’t mention here–is a doctor’s office.

  17. rosalind says:

    @Neil: heh. added bonus: any WAPO readers who click through and read the comment thread will get a taste of why they should be skeptical about Bruce Ivins re. the Anthrax attacks.

  18. russell says:

    What guys like this fail to grasp is that the $6M gross from his businesses is not all his own personal money.

    Nor was it all generated by his effort.

    The reason he has 500 employees is because there is 500 persons worth of work to do to generate that revenue.

    The reason he has to pay rent/lease/mortgage on the properties where his businesses operate is because those properties belong or belonged to someone else.

    The reason he has to pay utilities is because if he does not the lights, power, heat and/or A/C, water, sewer, etc., will not be there.

    He’s netting 10%, personally, from an overall revenue of $6M generated by a set of enterprises that involve 500 people.

    He’s two-tenths of one-percent of the people involved, and he’s getting 10% of the gross.

    WTF is his problem?

  19. A Conservative Teacher says:

    You’re really quite a generous person, letting a person keep money that he earned through his hard work, investments, time, energy, and vision. Someday I hope your generous nature extends to me and you let me keep my life, since apparently you and your Democratic allies now have the ability to control other people’s life, liberty, and property on the basis of tyranny and despotism.

    You’re a thug, and I’m very happy that for generations patriots and republicans have been able to keep you in the mud where you belong.

  20. MadDog says:

    @A Conservative Teacher:

    “…Someday I hope your generous nature extends to me and you let me keep my life, since apparently you and your Democratic allies now have the ability to control other people’s life, liberty, and property on the basis of tyranny and despotism.

    You’re a thug, and I’m very happy that for generations patriots and republicans have been able to keep you in the mud where you belong.”

    Hmmm…in the first paragraph above, you falsely state that it is Democrats who are controlling “…other people’s life, liberty, and property on the basis of tyranny and despotism.”

    In the second paragraph above, you admit the truth that it is you and your conservative brethren who are controlling us “…in the mud where we [sic] belong.”

    You’ve been hoisted on your very own petard, haven’t you?

  21. emptywheel says:

    @A Conservative Teacher: You know what? “Vision” is not what I’d call paying someone FEEDING me $11,400 a year.

    I’d say it’s a damn good reason not to eat at Subway, because not only does it threaten to make me sick, it’s not a system of exploitation I care to support.

  22. matt carmody says:

    @emptywheel: maybe not dumb as a brick but the same selfish intent. And he obviously thinks everyone is as numerically-challenged as the teabaggers. Another fucking doctor crying poverty.

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