The Republican presidential debates certainly have made for some interesting viewing and sound bites for viewers, regardless of their politics. The past three debates have centered not on national security or the European debt crisis—or the U.S. deficits for that matter—but rather on the fairness of the income tax code and appropriate tax rates for Americans.
Most agree the income tax rules are too arcane and complicated. Yet, neither the Democratic nor Republican party has been able to stop the continued expansion and vexing complications of the Internal Revenue Code.
The Tax Reform Act of 1986 aided in eliminating the so-called multiple write-offs, which dealt with cattle breeding, limited partnerships for oil and gas exploration and other activities designed to produce generous tax breaks. At the same time, the number of income tax brackets was reduced, including a simplification of the capital gains rates.
Now wealthy presidential contender Mitt Romney has released his tax returns, and the focus turns to a topic that Warren Buffett highlighted when he said he paid a
lower tax rate than his secretary.
This issue is relevant to independent insurance agents, whether they are employees or owners. For example, the owner of an established agency and in his mid-50s has to weigh the choice of receiving his full compensation or investing it, say in a new producer or account executive to help the agency grow. The agency owner's timeframe is 10 years.
There are no guarantees in running a business. The investment in the agency may yield positive results or it may not, and the producer who is hired may or may not work out. If the income tax rates and capital gains rates were identical, it would lower the motivation for the business owner to make the investment in the agency, rather than taking their full compensation. As a result, no new net jobs are added to the economy; while the Treasury Department takes in more current tax, it loses the tax of the hypothetical employee, including for payroll.
Without wading into what are fair tax rates for earned income, it is in the economy's and country's interest to have incentives for people to invest and grow their business. Consider an example of an executive who pays virtually no taxes on the accumulated value of his stock. His company does not pay dividends and hence his increase in net worth is not taxed. Capital gains do not enter into the equation. Yet a business like this can yield tremendous productivity gains and provide hundreds of thousands of jobs.
No doubt the upcoming presidential election will turn the spotlight on the U.S. tax system. Tax policy should be fair, particularly for small businesses that have been the engine of new job creation but do not have the size to extract special provisions in the tax code. In addition, small businesses are hampered with the plethora of regulations and often lack the ability to hire specialists to deal with them, all while contending with new rules and trying to compete locally and globally.
As debate centers on tax policy, consider the context of the entrepreneur who took risks to start a business and who has the responsibility of ensuring its survival.
Dave Evans (
dave.evans@iiaba.net)
is a certified financial planner and an IA l-h contributing editor.