Part 2 of 2
If Walmart is worried, there must be a problem.
The Arkansas-based retail juggernaut last week moved its planned dividend into late December from early January in an effort to help investors avoid leaping off the upcoming fiscal cliff.
It would be no shock to see other corporations do the same.
“There are complex fiscal and federal tax rate issues that may not be resolved in the next few weeks, despite the ongoing good faith negotiations between the administration and Congress to resolve details related to the fiscal cliff,” Wal-Mart said in a news release. “In light of this uncertainty, the board determined that moving our dividend payment up by a few days to 2012 was in the best interests of our shareholders.”
It isn’t just income taxes that are scheduled to go up Jan. 1; as of that day, the federal government will rake in a bigger cut from capital gains and dividends. Unless Congress acts, tax rate on dividends will reach as high as 39.6 percent for top earners, compared to the current 15 percent for the top four brackets and zero at the lowest end of the scale.
Battle lines are being drawn between President Barack Obama and the Republican-led U.S. House of Representatives in a political war that should have been settled long ago.
The former wants cuts eliminated for everybody earning more than $250,000; the House leadership wants a permanent extension to the tax cuts signed into law by President George W. Bush in 2003. House leaders might compromise by closing some tax loopholes or a cut in allowable deductions.
Both sides are wrong, according to Creighton University economist Ernie Goss.
On Obama’s position, Goss said: “This would only reduce the yearly deficit by less than 10 percent, and it would slow economic growth by reducing economic incentives.”
Republicans would be wrong to reject measures that would reduce or eliminate tax loopholes.
A compromise is crucial, but “in the end,” there is only one answer, Goss said.
“Fundamental tax reform that involves reducing the size of the federal government to approximately 20 percent of GDP and raises taxes on all wage earners but takes a bigger bite from higher-income earners,” Goss said. “The idea that we can solve the U.S. debt problem by only (taxing) the rich is pure lunacy. We have all over-consumed and under-produced. We must all now contribute to the solution.”
That’s one answer. There are others, and they all seem to glance past one fundamental reality: the damage higher taxes would inflict on small business.
The government defines a “small business” under a number of criteria. For example, a “small” manufacturer could have as many as 1,500 employees. But, that’s the feds’ definition. Fifteen hundred employees would be considered a major operation in the Cedar Valley and most other markets. A good guess would estimate a typical “small business” in this area at fewer than 100 employees — perhaps in most cases, a lot fewer.
Many small business owners file their taxes as individuals. It’s easy to see how these people would pass the $250,000 income threshold that would lump them with “the rich.” Peel away expenses like wages, taxes, rent, insurance, transportation and other overhead, and even the most successful among these entrepreneurs would struggle to approach that level. Add to their tax burden, and they contract their businesses to adapt. They make do with less. They don’t hire additional employees; worse, they may pare their existing work forces, if not in numbers then in hours.
For some business owners, the math behind having to do more for a much lower return may lead to an inevitable question: “Why bother?” For businesses already operating on the edge, it could mean closure.
Multiply that and you set in motion all the necessary ingredients for a recession.
The approaching fiscal cliff is more than a higher tax bill. For some businesses, it may be the End Times.
The clock is running on the end of the year, and with each day, it seems less likely that the government will find an answer. The gamesmanship of politics, after all, trumps all else.