Obama's 'tax cut' isn't a tax cut

Perhaps this is just semantics, but words mean things and I can't find any evidence that President Barack Obama's latest jobs proposal has a 'tax cut' for small businesses.

In my mind, a cut is when what you are currently paying is reduced. Under what I've read (as his bill isn't actually in print anywhere that I could find), the President is offering a lesser rate of taxation on a new activity: for hiring a new employee, there would be a credit of varying amounts depending on the type of employee (veteran, long-term unemployed).

His plan would also reduce the rate of Social Security taxation if there is an increase in payroll. Again, this is only available for a new activity: a pay hike for your employees which raises your payroll.

He also wants to extend the tax break for the purchase of new equipment. But you have to purchase the new equipment to be eligible for the break.

These are not cuts. If you don't actually do these things, you don't benefit. But they are credits.

In Columbus yesterday, Pres. Obama said of his plan:

It will provide tax relief for every worker and small business in America.

But that's not true. Every small business in America will be eligible for the tax relief, but not all will be able to perform the activity that will give them the 'relief.'

This is the same way it was with his 'tax breaks for every American' in 2009 after he first took office. Most of those 'cuts' were just credits for specific acts - like weatherizing your home, buying a new car, buying a new appliance, etc...

Additionally, these specific proposals are designed to be short-term and only 'continue' if you continue the activity - unlike an actual tax cut which would require no action and be in effect unless (or until) a future congress changed the code.

Words are important and when a politician speaks, it's important to know what they're actually saying. In this case, we're not getting a tax cut, no matter what President Obama and his supporters want to call it.

More contradictions from Obama

I've been thinking about the various proposals President Barack Obama has for 'helping' small business - and how, again, his words and actions are contradictory.

He is proposing a tax credit for hiring new employees, paying more to existing employees or purchasing equipment.

That's not necessarily a bad thing, though I oppose tax credits (an after-the-fact process of returning a small portion of what the government has taken from you in the first place) when an overall reduction in tax rates is so much more effective.

But the tax credit is only for a new hire, and doesn't apply to employees brought back after being laid off - nor does it continue to exist all the years that a company keeps that employee. The decision to hire another employee is never based upon a potential tax credit. It's based upon the need for that person and the sales to support the salary on a long-term basis.

He's also proposing to use TARP funds for bank loans to small businesses. You remember TARP? It's the temporary fund that was supposed to help bail out the banks deemed too big to fail, but that was also used to bail out the auto companies???? It's the fund that Obama says won't ever recoup all its loans and needs to charge ALL banks a 'recovery fee.' It's becoming a permanent source of funding for whatever spending Obama wants to do.

The bank loans he's talking about, though, are only through 'community' banks - banks that really don't need an infusion of cash to loan out. And Obama hasn't documented that there's even a need for such loans to small businesses - but determining a need for 'help' isn't relevant to how good the program sounds to the masses.

The main issue he's trying to address with this loan package is a direct result of the tighter restrictions government has placed on lending and capitalization of banks. The issues relating to sub-prime loans and the failures of many with government-back mortgages resulted in Congress 'doing something' to solve problems resulting from the last time they 'did something.' Tighter regulatory controls on the assets banks have to keep mean they have been more restrictive with the qualifications for loans. Small community banks think that if Obama's loan program will absolve them from loss on the riskier borrowers, then they might take advantage of it and lend to people they've previously denied.

What? Yes, loaning to people who have been determined to be too much of a risk for a 'regular' loan. Isn't that what got us into this economic mess in the first place? Is there really a need to loan to people/businesses that are that risky?

But there's a problem - and a contradiction - with what the President says.

At the same time he's planning small tax credits and loans for certain behavior, he's talking about raising tax rates on 'the rich.' Many small business owners, because of the way they've structured their companies, fall into the 'rich' designation because they report their business earnings as part of their personal income tax reports. This means they're taxed at the personal, not corporate, rate. Of course, for most, they're paying taxes on paper earnings they never actually see in terms of dollars in their wallets.

I don't want this to be a post focused on the tax code - a 60,044-page/25-volume monstrosity that no one, not even the government enforcers, actually understands. But it's important to note that because of the tax code and the complicated nature of it and corporation structures, many businesses go this route and end up being designated as 'rich' as a result.

For these types of business owners, a one-time, limited, tax credit is not enough to overcome the uncertainty of future, permanent taxes.

The politicians in the federal government are constantly talking about the need to raise taxes. The Associate Press reports that Obama's budget raises taxes on businesses. Various reports indicate that increased tax rates, health care 'reform' and the expiration of the Bush tax cuts of 2001 will mean more money paid to the federal government, detracting from anticipated profits businesses are earning.

On the state and local level, the discussion is much the same: government needs more money to continue its spending patterns (or to expand them in the guise of 'helping' the economy) and someone has to pay. In December, Ohio decided to 'delay' a phased-in tax cut that took effect in January of last year. In Toledo, there's discussion of raising the payroll income tax. That's more money coming OUT of the earnings and spendable income of individuals and business owners.

Unlike government and politicians, business owners have to plan for such things. When there is uncertainty about future costs, they will be cautious in their spending, choosing to save for future obligations rather than incur additional expenses while awaiting clarification.

And they're certainly not going to borrow money for anything if they think future earnings will be negatively impacted by higher taxes, limiting their ability to actually repay the loan.

They've also seen the complicated and arbitrary rules associated with such loans when the politicians get to decide the terms, many of them retroactive in enforcement. Will these small business owners be subject to earnings and pay limitations if they accept this government money?

Uncertainty is the killer.

So while Obama is proposing various programs to provide what he considers to be 'help,' he and his fellow Democrats in Congress are planning various actions that will definitely 'hurt' small business.

I'll concede that perhaps, despite how 'smart' people seem to think he is, our President might not have a clue.

Obama has never run a business. He's never been responsible for meeting a payroll, making decisions about hiring/firing or purchasing equipment for an operation. He's never had to develop a business plan and weigh various costs against potential income. He's never had to budget for today's operations while ensuring protection against tomorrow's decline or anticipating future growth.

He's never had to experience the decision-making process that all business owners have to face. So why should we expect that any policies relating to small business - or any business, for that matter - have any basis in reality?

We shouldn't ... but he's the President and if he doesn't have the personal experience, he's supposed to surround himself with people who do so he doesn't continually contradict himself by saying one thing and doing another.

Obama tries to redefine 'tax cut'

As we all learned from George Orwell: if you can control the language, you can control the people.

President Barack Obama, in his state of the union address, said:

Let me repeat: we cut taxes. We cut taxes for 95 percent of working families. We cut taxes for small businesses. We cut taxes for first-time homebuyers. We cut taxes for parents trying to care for their children. We cut taxes for 8 million Americans paying for college. As a result, millions of Americans had more to spend on gas, and food and other necessities, all of which helped businesses keep more workers. And we haven’t raised income taxes by a single dime on a single person. Not a single dime.

These are NOT tax cuts. A tax cut is when the amount you have to pay is lowered - when you get to keep more of what you earned.

These are tax credits - and are called such in all the legislation. The government collects the tax from you and then disguises their handout as some sort of giveaway you're supposed to be grateful for - but only if you happen to be in the particular group whose votes their trying to purchase.

Under the tax credit concept, the amount you owe is set and then the loving politicians who just want to take care of you graciously allow you to deduct from the amount certain dollars as a reward for the behavior they want to encourage.

How magnanimous of them!

The Wall Street Journal recognized this during the 2008 campaign:

But how does he conjure this miracle, especially since more than a third of all Americans already pay no income taxes at all? There are several sleights of hand, but the most creative is to redefine the meaning of "tax cut."

For the Obama Democrats, a tax cut is no longer letting you keep more of what you earn. In their lexicon, a tax cut includes tens of billions of dollars in government handouts that are disguised by the phrase "tax credit."(emphasis added)

If they'd actually cut taxes, you'd have more money to spend on the things you want rather than the things they want. If it was a true tax cut, it wouldn't matter how you spent the extra money, but with a 'credit' you're just following their dictates on how you should spend your limited dollars.

Then there is the little twist in the statement that few actually catch. Obama says he did this for "95% of working families." Here's the twist: 95% were eligible. He has no idea if 95% actually were able to take advantage of the credits because most of them haven't filed their taxes yet!

The only way the government will know how many families got their so-called 'tax cut' is when they analyze the tax returns to see the actual number who list the credits on their forms.

I'm pretty certain that 95% of those eligible didn't take advantage of all three 'cuts' he mentioned. In fact, I'd wager that less than 50% of 'working families' took advantage of the first-time home buyer credit - maybe even less than 25% because most people in that category already are in homes.

This is just another lie presented in the worst of ways to make you think you've gotten something you really haven't.

The problem is, though, that most people won't make the distinction between tax 'cut' and tax 'credit' and will never know the truth.