Pay More Taxes Every Year

You cannot escape the daily economic reports and endless diatribe about tax rates in the media.  The journalists and politicians all have their opinion on how the economy and tax rates effect small business and investment.  But what I find more important is how entrepreneurs and business owners use tax rates to make decisions .  My guess is not so much.

When people ask me how I feel about tax rates on small businesses, my answer is this:  My goal is to pay more taxes every year. 

In 1986 when the top federal tax rate was 50% and prime interest rate was 9%, I was making plans to start my first business with no thoughts about taxes, interest rates or general economic conditions.  The personal computer was just making its way to the masses and I got a loan for an IBM-PC for $3,000 and was on the cutting edge of a career in Entrepreneurship.

first business cardMy first business was Franklin Jaunzemis, an accounting and bookkeeping practice for small businesses.  I had a partner who was a CPA and together our firm did financial statements for over 100 small businesses per month.  Talk about a crash course in entrepreneurship!  I had access to the most important and private data of over 100 business owners and could compare what made a few very successful while so many others struggled.

The one lesson that I will never forget was how the successful businesses handled their taxes.  The most profitable business  I worked with at that time was a gas station/auto repair shop owned by Charlie and his annual tax bill was several multiples more than my annual income.   The first year I met with him to go over his tax return, I was nervous because he owed so very much in federal taxes, yet when I told him how much he owed, Charlie smiled and said “I got to keep just as much”.   He was in a 50% tax bracket and pleased as punch that he was able to keep as much as he paid in taxes.

I was quickly able to see the difference in how other business owners reacted to taxes.  I had another client, Earl, who was in exactly the same line of business, but he was not near as successful and he hated taxes.  I mean really hated taxes, he called me the “grim reaper” since I was the one that prepared his tax returns.  He clearly didn’t understand that growing your business would mean growing your tax bill.  So he would constantly ask me to look for tax loopholes instead of focusing on growing his profits.

In my small data sampling of 100 small businesses I could clearly see that the successful businesses, the ones who grew and hired more employees, were never worried about their taxes.  The least successful ones who couldn’t figure out how to make their companies profitable, they worried more about taxes, but these businesses were not capable of fueling economic growth and creating jobs.

I spent several years learning the ropes of small business and the difficulties of partnerships that go sour as Franklin Jaunzemis ended up in a partnership dispute that we could not reconcile.  Later in another partnership, I finally had a winning small business that I started and was ready to sell and made my first successful exit from SiteClean, a construction recycling company I built.   When I listed the business for sale in 1996, I did not know the capital gains rate was 28%. By the time the business sold in 1997, the Taxpayer Relief Act of 1997 was enacted and the top capital gains rate fell from 28% to 20% – lucky me!  However, I only know these facts in retrospect and was not aware of them at the time.

Worrying about tax and economic policy is not what keeps entrepreneurs up at night.  We have a passion to grow businesses and clearly see the economy and tax rates as part of a level playing field.  All of our competitors have the same rules to play by, they can grow bigger and move into different tax brackets and take advantage of tax loopholes, but so can we.  Any successful entrepreneur will have a clear understanding that if you are growing the profits of your business then you are paying more in taxes than the previous year … it is simple math.

I am not suggesting that you don’t understand the tax implications of your business decisions because understanding taxes is part of owning a business, but you should not let the media or politicians convince you that low tax rates is what drives entrepreneurial growth in this country because it is not.

Entrepreneur and investor, Mark Cuban said it best:

Entrepreneurs who create something out of nothing don’t care what tax rates are. Bill Gates didn’t monitor the marginal tax rate when he dropped out of Harvard and started MicroSoft (btw, it was a ton higher than it is today). Michael Dell didn’t wonder what the capital gains tax was when he started PC’s Limited, and then grew it into Dell Computer. I doubt that any great business or invention started with a discussion or even a consideration of what the current or projected income or capital gains tax was or would be.

The impact of tax rates on productivity and development is something economists masturbate about, enterpreneurs don’t waste their time thinking about it. We have business to do.

Entrepreneurs live to be entrepreneurs. I have never had a discussion with anyone about starting a business that included tax rates. Ever. If anyone that wanted an investment from me made a point of discussing tax rates as an impact on their business, I wouldnt invest in them. Ever.

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