Wednesday, January 30, 2013

Why This Is 'Best-Looking' GDP Drop You'll Ever See

I agree with this analysis, which was featured on CNBC. The stock market is in a bubble. Witness the differences between Apple and Amazon: Apple beats projections and the stock falls, Amazon misses earnings targets and by some strange logic of "improving margins" rises. We are witnessing institutional investors moving from bonds globally into equities (stocks). The casual investor ("retail investor") is also moving back into the market. Sounds a lot like 1999 and 2007.

In the period from 1999 to 2003 or so, the Fed lowered rates and created liquidity. That masked some underlying issues -- not the least of which is governmental debts at the local, state, and federal level. Investors seek returns, and money in a low-interest economy moves to either bond price gaming or equities. Stocks and commodities rise as the dollar falls: inflationary, in Austrian/Chicago terms, not the same as consumer inflation (a point I've made several times, since Paul Krugman and others misrepresent the notion of inflationary pressures in Austrian theory).

Basically, the Fed is the "buyer of last resort" for government debt and some securitized loan debt. All of these purchases mask government debt and risks, because the securities purchased are from the housing GSEs and student loans. (With student loan debt at $1T we have a bubble in education, too.)

So, here's why stocks might rise (for now) and mask the structural problems of our economy:
Why This Is 'Best-Looking' GDP Drop You'll Ever See: The darker scenario, in fact, is actually bullish for stocks, which have ridden the wave of $3 trillion in central bank liquidity to eclipse five-year highs and push towards a new record. 
Fed Chairman Ben Bernanke "has to keep the economy high as a kite. He has to make sure we don't sober up and realize how screwed up we are," said Peter Schiff, founder and CEO at Euro Pacific Capital in New York. "We don't have a real recovery. It's an illusion, it's a drug-induced high. The minute you take away the drugs we come down. We can't stop easing, ever." 
Schiff is concerned that a recession looms that will dwarf the financial crisis woes, a condition he attributes to an overzealous Fed that should stop creating money and generating inflation.
 When the student loan, new (but smaller) housing, new (and also smaller) tech, and energy bubbles go "pop" it will not be pretty.

Are stock undervalued based on P/E? Absolutely, in historical terms. But, you invest based on the likely forward earnings of companies. What if these bubbles pop in the next two years, accompanied by municipal bankruptcies (Detroit, I'm looking at you), and other stresses?

My guess, and it is only a guess, is that we are still headed for another mild recision. It might be in late 2013 or even as remote as 2014. But, I am convinced something is going to snap before the next four years are up. This will put extreme pressure on Washington to do something to demonstrate fiscal restraint. But, I don't have any faith that our leaders will do the right things.

I am also waiting for California and other states to magically discover higher tax revenue forecasts are incorrect, along with growth forecasts. Anticipated surpluses will be short-lived or never appear.

Let's hope I'm wrong about our elected leaders and the Federal Reserve.

Milton Friedman and others have written that liquidity is needed during a downturn. It isn't only a Keynesian idea. But, there is a major difference between helping consumers and simply shifting government debt from bucket A to bucket B. The Depression was a liquidity crises, but now officials are responding in ways that only help the investor class. That's not surprising, but it is worrisome.

If the "doves" win and we keep cutting rates without significant job growth, we will be emulating Japan.

Monday, January 28, 2013

Debt Ceiling: Dumb Law for Lazy Legislators

I'm going to admit to contradictory positions: 1) If in Congress, I would vote against raising the debt ceiling. 2) I consider the debt ceiling an incredibly stupid concept.

First, I would vote against raising the debt ceiling because it is one of the few ways to force cuts to the rate of growth in government. In Washington, seldom are "cuts" genuine reductions in spending; cuts are reductions to projected increases in spending. Baseline budgeting is reckless — in households, business, or government. Imagine basing your spending for 2014 based on 2013 + a hoped-for raise. Baseline budgets assume population growth, inflation, increased revenues, and more. The calculations are prone to error.

Consider how easy it is for baselines to go awry. An increase in interest rates leads to higher debt maintenance costs, leads to decreased available revenues. A recession leads to lower tax receipts, and less revenues, while it might also increase demands for some services. You simply cannot predict the thousands of variables involved in federal or state spending.

Having a debt ceiling forces Congress to decide: do we spend more to deal with current circumstances, or do we cut spending to address other fiscal concerns? It is a debate that we should have every six months, anyway.

Some history:
[The] debt ceiling was supposed to make things easier. A hundred years ago, it seemed so straightforward. 
When Congress wanted to spend, it spent. And if it needed to borrow, it approved the sale of a bunch of Treasury bonds. Congress would consider each new bond individually. 
"They would literally approve the form of the security, the purpose of the security, what the duration was going to be, what the interest rate was going to be," says Susan Irving from the Government Accountability Office.
But with the start of World War I, that process became way too time consuming.
"If you think about the number of decisions that go on during a war," Irving says, "you're coming in constantly. 'Oh, now we need to borrow up to so much to build more tanks' "
So Congress delegated the details of bond sales to the Treasury Department. 
But Don Ritchie, the official historian of the Senate, says Congress was wary about giving too much power over to the Treasury. 
"They knew they had to do it, there was an urgency to it," Ritchie says. "But one way to control it was to say, 'You have a cap, you just can't go beyond that limit." 
So in 1917, Congress came up with the first real debt limit. They wanted to make their lives easier, but not give up too much control. Sort of like putting a leash on a toddler.
— NPR Money: History of the Debt Ceiling
But, my second point is also important: the formal "Debt Ceiling" is stupid law. If the House and Senate decide to spend money, then they are implicitly agreeing to any deficits and increases to the total debt caused by that spending. If Congress approves disaster spending, they are agreeing to any deficit that results. Whatever Congress spends, legislators must understand that you need to pay the bills eventually.

The flip-side is that the debt ceiling debates allow a current Congress to undo spending of previous Congresses. Without mandated semi-annual spending revisions, the debt ceiling becomes the rare opportunity to undo past mistakes.

Still, it is bad law. The United States is Constitutionally mandated to pay its bills. The only way to have a legally acceptable debt ceiling, therefore, is to pay all debts by cutting programs dramatically.

Here is an interesting perspective on the debt ceiling:
Debt-Ceiling Gimmickry Is Unbecoming A Rational Government
[http://www.forbes.com/sites/richardsalsman/2013/01/17/debt-ceiling-gimmickry-is-unbecoming-a-rational-government/]
Richard M. Salsman
January 17, 2013

[Since] the U.S. debt ceiling was adopted in 1916, Democrats have controlled Congress two-thirds of the time, and federal spending has averaged of 19% of GDP (while deficits averaged 3.7% of GDP); in contrast, Republicans have controlled Congress one-third of the time, and spending has averaged 14% of GDP (while deficits have averaged 1.3% of GDP). Generally, Democrats have been more fiscally reckless. Yet history also reveals that each party, whenever it has controlled Congress while facing the rival party in the White House, has resisted raising the debt ceiling and has used it as a political bargaining chip. This tactic brazenly assaults the "full faith and credit" of the U.S., yet another widely-ignored provision of the U.S. Constitution (Article IV, Section 1).
— from Forbes.com
What would happen if Congress fails to raise the debt ceiling? The government would have to decide what is and is not a legally mandated debt payment, as part of the "full faith and credit" of the United States. Non-essential services would cease, while bond payments would continue. Still, bond prices would collapse, interest rates would soar, and future debt payments would therefore spiral dramatically — compounding the debt problem.

Thanks, Congress.

Sunday, January 27, 2013

Barack Obama’s new ‘grass-roots’ group isn't quite - Kenneth P. Vogel and Tarini Parti and Byron Tau - POLITICO.com

This is fairly revealing of how things work:

Barack Obama’s new ‘grass-roots’ group isn't quite - Kenneth P. Vogel and Tarini Parti and Byron Tau - POLITICO.com

In its first days, Organizing for Action has closely affiliated itself with insider liberal organizations funded by mega-donors like George Soros and corporations such as Lockheed Martin, Citi and Duke Energy.
… Dubbed the “Road Ahead” meeting, the conference was sponsored by a White House-allied trade association called Business Forward, which is funded by major corporations including Microsoft, Walmart and PG&E – each of which sent senior executives to participate in a panel on how to boost American economic competitiveness.
Yep, change you can believe in, right?

Wednesday, January 23, 2013

Wealthy Win with Fiscal Cliff Agreement

Media chatter implies "the rich" are about to pay their "fair share" of taxes with the Fiscal Cliff agreement of early 2013. Such claims ignore reality, which is nothing new when it comes to media coverage of the intersection of economics and politics.

First, "the rich" and the truly wealthy, those in the top half of one percent or so in personal net value, are unlikely to pay much more in federal taxes. Some might actually pay less with this agreement, depending on where and how they invest. How is this possible?

The tax rate on earned income is rising to 39.6% for households earning more than $450,000 annually ($400,000 for individuals). The new Medicare "supplemental" tax increase of 0.9 percent (which doesn't actually go to Medicare) is also based on household income of $250,000 ($200,000 for individuals).

But, what if your increases in personal wealth come from investing? Carried interest, dividends, and other wealth streams are not going to be taxed at significantly higher rates — and there are lots of loopholes offsetting even modest increases in taxation.

Dividend taxes for households with taxable incomes of $450,000 per year will rise from 15 percent to 20 percent, plus an additional 3.8% surcharge for "Medicare" (again, not really for Medicare, but we're paying for the "Affordable" Care Act one way or another. The 20 percent rate means that the investor class, as compared to "workers" earning higher incomes, avoided a serious tax increase. Plus, they got some really weird loopholes!

An example of a loophole for the wealthy, as compared to high-income worker: There is a new tax on rental income — but it does not apply to professional real estate investors. Yes, seriously, the government is taxing higher rental incomes if you are not in the business of real estate investing!

Read more: http://www.businessinsider.com/dividend-taxes-2013-1#ixzz2GqYYleY6

The dividend tax break alone skews who pays taxes in our nation. Remember, we have an income tax, and the wealthy don't have higher wage-based incomes — they have investment income. (There are some Constitutional arguments I've addressed on other posts, too. The Sixteenth Amendment approved an income tax, not a wealth tax.)

Consider the following data:

  • 47% of all dividend income is earned by the 3.8% of American households that earn more than $200,000.
  • The "rich" ($200,000 annual income) collect $70 billion in annual dividends (and that was in 2009, a bad year).
  • The "fiscal cliff" deal saves these upper-class households $14 billion a year in taxes.
  • The top 400 highest earning taxpayers received about $10 billion a year in dividends, or $25 million apiece in 2009. The super-wealthy just received a $5 million tax break, individually.

The fiscal cliff deal has so many special tax breaks hidden within the 250 pages of the legislation, that I can almost guarantee the government will experience little to no significant increase in tax revenues from the wealthy. It will be the "working almost-wealthy" that will bear any new tax burdens.

For example, "green energy" investment and use credits remain in the tax code. Solar panels, windmills, and biomass burners are expensive investments. Only the wealthy are going to benefit from tax breaks for investments in alternative energy companies. Burning "biomass" doesn't help the environment (it's highly inefficient), so tax breaks that feel good aren't necessarily great for the environment.

When I go through the entire legislation, I'm sure it will be depressing. But, the investor class might find lots to love in the legislation.

More debt, more tax loopholes, and more inequity. What a deal.

Monday, January 21, 2013

President Obama’s Second Inaugural Address - Washington Wire - WSJ

The Inaugural Address reveals a lot about Pres. Obama.
President Obama’s Second Inaugural Address - Washington Wire - WSJ
Through it all, we have never relinquished our skepticism of central authority, nor have we succumbed to the fiction that all society’s ills can be cured through government alone. Our celebration of initiative and enterprise; our insistence on hard work and personal responsibility, are constants in our character.
I wish I could believe he meant those words, but too often it seems Pres. Obama has faith in central planning, that bureaucrats do know best what is "right" for the rest of us. He is insufficiently skeptical of government, its expertise, and its power.

The next section is more along the lines of "You didn't build that…" (a statement I and many others have explored in context of his full campaign speech). The president reminds us that "collectively" we stand. A false argument, since nobody is arguing against all government.
But we have always understood that when times change, so must we; that fidelity to our founding principles requires new responses to new challenges; that preserving our individual freedoms ultimately requires collective action. For the American people can no more meet the demands of today’s world by acting alone than American soldiers could have met the forces of fascism or communism with muskets and militias. No single person can train all the math and science teachers we’ll need to equip our children for the future, or build the roads and networks and research labs that will bring new jobs and businesses to our shores. Now, more than ever, we must do these things together, as one nation, and one people.
Elections have consequences. Expect more, and more complex, government programs.
We understand that outworn programs are inadequate to the needs of our time. We must harness new ideas and technology to remake our government, revamp our tax code, reform our schools, and empower our citizens with the skills they need to work harder, learn more, and reach higher.
The following, near the end of the address, packs several simplistic slogans into what should be a speech of unification. There are a great many logical and factual twists, which I won't detail fully here. The paragraph demonstrates the ideals of this president.
It is now our generation’s task to carry on what those pioneers began. For our journey is not complete until our wives, our mothers, and daughters can earn a living equal to their efforts. Our journey is not complete until our gay brothers and sisters are treated like anyone else under the law – for if we are truly created equal, then surely the love we commit to one another must be equal as well. Our journey is not complete until no citizen is forced to wait for hours to exercise the right to vote. Our journey is not complete until we find a better way to welcome the striving, hopeful immigrants who still see America as a land of opportunity; until bright young students and engineers are enlisted in our workforce rather than expelled from our country. Our journey is not complete until all our children, from the streets of Detroit to the hills of Appalachia to the quiet lanes of Newtown, know that they are cared for, and cherished, and always safe from harm.
The problems with the above range from "earn a equal living" (which requires an entire book-length treatise to examine) to notions that somebody else is expelling immigrants from this nation. There were more women and minorities in past presidential cabinets — having a mixed-race president doesn't excuse his insularity and the homogeneous nature of his cabinet. Isn't immigration enforced by the executive branch, and isn't this administration the most aggressive with deportations in history? The conclusion is nothing but rhetorical flourishes, without substance.

That this administration pays women less than men, deports more illegal immigrants, and has done little to help either urban cores or rural towns while supporting crony capitalism belies the inaugural address.

I had hopes the president might, just might, try to recalibrate. I miss Bill Clinton more each year.

Tuesday, January 15, 2013

Fiscal Cliff Deal Will Raise Taxes On 77 Percent Of Americans: Tax Policy Center Analysis

This story only captures a small part of the new taxes households face in 2013. But, let us begin with this headline:

Fiscal Cliff Deal Will Raise Taxes On 77 Percent Of Americans: Tax Policy Center Analysis
By STEPHEN OHLEMACHER 01/02/13 07:49 AM ET EST

Social Security is financed by a 12.4 percent tax on wages up to $113,700, with employers paying half and workers paying the other half. Obama and Congress reduced the share paid by workers from 6.2 percent to 4.2 percent for 2011 and 2012, saving a typical family about $1,000 a year.

Obama pushed hard to enact the payroll tax cut for 2011 and to extend it through 2012. But it was never fully embraced by either party, and this time around, there was general agreement to let it expire.

The new tax package would increase the income tax rate from 35 percent to 39.6 percent on income above $400,000 for individuals and $450,000 for married couples. Investment taxes would increase for people who fall in the new top tax bracket.

High-income families will also pay higher taxes this year as part of Obama's 2010 health care law. As part of that law, a new 3.8 percent tax is being imposed on investment income for individuals making more than $200,000 a year and couples making more than $250,000.

Together, the new tax package and Obama's health care law will produce significant tax increases for many high-income families.

So, we start 2013 with "back to the old" tax increases on 77 percent of households. Personally, I didn't support the payroll tax "holiday" anyway — Social Security and other benefit programs should be "pay-go" (pay as you go) at worst and actuarially-based investment programs at best. I called the holiday "fiscal malpractice" and continue to consider such great political stunts horrible policy.

See: http://almostclassical.blogspot.com/2011/12/political-wisdom-fiscal-malpractice.html

Adding to the annual deficit and the long-term debt provided minimal (if any) stimulus to the economy and the long-term consequences are likely outweigh any fractional boost to the Gross Domestic Product.

The bad news is that families suddenly "missing" $1000 are going to notice. You remove $30 or so from a paycheck and that's a tank of gasoline, a dinner, a shirt, cheap shoes, or discount jeans. People with lower incomes are going to cut spending because they won't have a choice. If there had been no tax holiday, we wouldn't be pondering the psychological effect of a return to normal rates.

In addition to the return to the old payroll tax rate:
  • State taxes and local taxes, in various forms, are increasing nationally. 
  • Affordable Care Act taxes on medical devices begin to take effect.
  • Health care premiums will increase, as riskier individuals enter the market. 
We do need to increase revenues to pay off the debt amasses over the last half century. (Yes, there was a lower annual deficit at various times, but even the "balanced budget" of the Clinton years was an illusion of gimmickry — and the debt was not lowered, only the deficit.) We want more and more, without paying for it. Sorry, but the nation is broke.

I do struggle with tax issues, but I know we're not going to cut government spending as dramatically as I desire, nor are we going to shift spending to genuinely stimulative and essential services. We could be investing in infrastructure or meaningful research, but fixing the Interstate system isn't sexy. No, we'll raise taxes, not cut spending until we're in an even more dramatic crisis, and continue to accelerate our downhill slide.

Repeatedly, I've argued for saner tax policies (won't happen), wiser spending (won't happen), and more personal responsibility (won't happen).

The "Fiscal Cliff" deal is a sad joke. It is a 250-page pile of pork, waste, tax increases, and avoidance of the serious issues the nation faces. The public, unfortunately, only knows there was an agreement and President Obama was the "winner" politically. The nation loses, though, when you read the bill.

That a "simple" agreement is 250 pages with lots of special giveaways to chosen industries and groups should remind us that Washington is broken… and broke.

I expect 2013 to be a lot like 2011 and 2012. Not a good thing.

Saturday, January 12, 2013

How Bonds Work (and Why a $1T Coin Won't Work)

In the Austrian School of economic theory, government debt causes "inflation." That inflation might or might not result in higher consumer prices, which causes some confusion among politicians, pundits, and the public when they hear claims that governmental debt causes inflationary pressures. Reasonably, people assume inflation always means price increases. However, what the economists are describing is a bond market response to debt financing.

As I am going to discuss in another post, Paul Krugman has abused the term "inflation" when discussing Austrian economic theory. As a professor, he certainly understands that Austrian/Chicago School theorists use the term inflation to mean any devaluation of fiscal reserves. Basically, dollars lose value because the bond market doesn't have faith in the government to behave responsibly.

Bond markets are strange, powerful monsters. Upset the bond market and you'll find interest rates skyrocketing. Treat the bond market wisely, issuing low-rate debt that is as low-risk as possible, and a government can finance infrastructure projects or new programs quite affordably. The key is that people have to see the bonds of a local government body, a state, or the federal government as nearly risk-free if investors are going to accept ultra-low interest payments.

Let's create a hypothetical situation.

The stock market and commodities are experiencing high volatility. Each week, the market rises or falls up to 5 percent. The volatility bothers some investors, including you, so these wise and risk-averse souls turn to low-interest but secure government bonds.

For our hypothetical bond example, let us assume that "Zorkland" sells $100 bonds with a 10-year expiration, yielding 5 percent annually. Over a decade, the Zorkland treasury will pay $50 in fixed interest and have to return the initial $100 face value to the last holder of the bond.

Now, imagine you purchased this bond and hold it for five years. You invested $100 in the bond, helping your government finance projects or wars, or even payment to other bond holders — bonds do resemble a pyramid scheme at times. During that fifth year, you need access to cash. Desperate for liquidity, you sell your $100 bond for $90 to another investor. You did not lose money, since you earned $25 in payments ($5 for five years) and received $90 from the new bond owner. You gained a net $15 — not much, but better than a loss.

Examining your side of the transaction, you might have done better or worse than people investing in other asset markets. Stocks might have done well. Metals might have done well. If other investments paid 15 percent a year, then there will be little market for your bond. Why buy a bond when other investments offer better returns? As a result, investors might soon offer less than $90 for a bond; paying less results in a greater real return. Bond prices falling means the investors are seeking a higher rate of return to compete against other asset markets or investors fear the government issuing the bonds might not be able to redeem the bonds at expiration. Either way, less demand equals higher interest rates.

The second owner of the bond, having paid $90, still receives $5 annual payments. While this is still 5 percent of the face value of the bond, the second investor is receiving a 5.5 percent annual dividend. That is because $5 is 5.5555 percent of $90. The new bond holder discovers in two years that Acme Widget stock is rising 20 percent annually and pays a small dividend, so the holder sells the bond to yet a third investor. This time, the bond sells for $80. The second owner has neither gained nor lost money, excluding the effects of inflation, and can now buy the better investment in Acme Widgets.

The last bond holder receives three years of payments, seven having elapsed, and gets to redeem the bond for face value. This last investor, therefore risked $80 for a net return of $35 at the maturity of the bond. That is a 43.75 percent return on the original $80. Not a bad deal at all for the final investor.

From the government perspective, the bond with a fixed annual payment was going to cost $50 no matter what. Ah, but things are not that simple.

As the bond went from hand to hand, the effective interest rate increased from 5 to 5.56 to 6.25 percent. As existing bonds yielded better interest to their holders, the government had to promise a higher interest rate on any new bonds issued. The interest rate the government paid on bonds likely increased a full percentage point ("100 basis points") and this caused a cascade effect throughout the economy. Welcome to inflation.

Higher "coupon rates" (the annual payment to bond holders) mean the government must raise more debt financing (selling yet more bonds and causing a debt spiral), increase taxes (potentially causing an economic slowdown or voter revolt), or cut spending on programs people want.

In reality, things are far more complex. Governments issue bonds with a variety of maturation periods. You might find two-year, five-year, and ten-year bonds in a market. The more distant the maturity, typically the higher the interest paid. Why? Because it is much harder to predict the financial situation in ten years than in two, so there is more risk associated with a ten-year bond. To convince people to finance public debt and wait ten years to redeem the principle amount, governments pay higher interest.

In the current situation of the United States bond market, the Federal Reserve is actively, intentionally, distorting the bond market to keep interest rates low. That is why we are not seeing consumer inflation and economists like Paul Krugman can say, "See! Things are fine with the current national debt." The Federal Reserve is buying bonds from the Treasury. The Fed is not, technically, part of the Executive Branch. It is an independent body chartered to maintain the currency and inter-bank lending.

As the U.S. debt increases and people trust the government less, the price of bonds falls and interest rates increase. But, what if the Fed steps in and pays an artificially high price for bonds? This keeps interest rates low and bond prices high, creating the illusion all is well. The Fed becomes the "investor of last resort" in the bond market. At some point, though, the Fed won't be able to buy any more bonds. Then, the bond market will collapse and instead of a slow decline in price and increase in yield we will witness a sharp shift in the bond market. At least that is the fear of many of us with an Austrian School perspective.

For the Fed to indefinitely support the bond market, it would need to increase the money supply. Increasing the supply devalues the dollar, causing some inflation but not the horrible spike of a bond panic.

Basically, President Obama and Congress are gambling that the Fed can overwhelm the natural tendency — and purpose — of the bond market. As long as the Fed engages in quantitative easing, it can keep masking the debt problem. But, QE will end at some point.

There has been chatter (and I'm not linking to the stories) that Treasury could mint a $1 trillion coin, deposit it with the New York Fed, and then the Federal Reserve could continue to buy federal debt in the form of bonds. Such ideas are absurd — and dangerous. I don't care how many "brilliant" economists accept this idea as plausible. Do these morons imagine the markets won't see right through such manipulation? Right now, the markets are responding to the distortions caused by Fed policy. Since bonds are offering weak returns, money is flowing into equities and driving up stock prices. Commodities are also benefiting.

But, the game has to end someday. How will it end? Badly. Not even a magical $1 trillion coin will fool the markets. I happen to believe that any additional gaming of the system will spook the bond market and equities markets. Talk of endlessly printing money or minting magical coins will spook the market as badly as an abrupt halt to Fed bond purchases.

The more stable and better managed a government, the smaller the gap between short-term and long-term bond yields. This is known as the "yield curve" and reflects how much people trust leaders to behave responsibly. Higher interest is always a warning sign from the market to the leadership: manage your money better.

I realize this post has simplified bond concepts to the point investors and economists might cry foul. My goal with this post was to explain why rising interest rates reflect poorly on a government, and how governments can mask the actual market pressures. I hope this helps a few people understand why Austrian economists do view the current situation as inflationary, even if consumer inflation is modest.

Wednesday, January 9, 2013

Bloomberg and Obama Misrepresent Tax Hikes on Small Business (Part Two)

(This is Part Two of two. See Small Business for Part One)

My previous post on the issue of taxes and small business focused on the nature of entrepreneurial risk and reward in our system. I do fear there is a tendency to punish success, viewing with suspicion those individuals who create and nurture businesses through rapid growth. Many people assume the worst of financially successful business owners, and that's ironic in a nation built on free market capitalism.

A friend of mine recently commented that entertainers and athletes earning far more than most entrepreneurs seems to be excluded from such suspicions. Apparently, a $20 million film contract is okay, but earn $1 million running a business and we'll attribute the worst motives to you.

President Obama and others have tried to use this public resentment and distrust of successful entrepreneurs by suggesting tax increases on "the rich" won't affect "small business" — because we all love small businesses with their little Main Street shops.

The Heritage Foundation, while far from an impartial source, offers evidence supporting my previous post that arguments that generalize the nature of small business are misleading. The idea that "only" a fraction of small businesses would be ensnared by tax rate increases and other "revenue enhancements" ignores the fact that those affected are precisely the businesses that are the engine of job creation.
Bloomberg and Obama Misrepresent Tax Hikes on Small Business
http://blog.heritage.org/2012/10/10/bloomberg-and-obama-misrepresent-tax-hikes-on-small-business/The Heritage Foundation
October 10, 2012

…President Obama said that only 3 percent of small businesses would pay higher rates under his plan to increase the top two marginal tax rates. The implication was that job creation wouldn't suffer, because so few businesses would pay higher tax rates under his plan.

Bloomberg… repeated this misleading statistic.
Again, I recommend my previous post [link] on this matter. Only a few members of any group are the best and most successful, regardless of how success is defined. In a free market economy, business success is generally marked by higher income, which in turn allows the hiring of employees and expansion of the business. Only a few, a tiny fraction of all businesses, are successful enough to stumble into higher tax rates.

Business that do find successful ideas tend to grow most within their first five years. Larger corporations also experience spikes in growth, often through acquisition of small explosive-growth companies. Entrepreneurs risk everything, hoping to launch what will either become a larger enterprise or a take-over target for a larger firm.

Most small businesses are not entrepreneurial. It is a common mistake to assume small businesses are focused on growth, but that is not the case. Most small businesses are simply consultants, freelancers, and small family businesses with modest aspirations. The owners of these businesses are important to the economy, but they are not responsible for most job growth.

Jobs are created by aggressive, daring, risk takers with an eye towards explosive growth. Entrepreneurs are rare, and successful enterprises are even rarer. Only about 10 percent of small businesses are entrepreneurial and job creators.

To dismiss a tax increase because it will only affect the companies that are most successful is absurd. Allow me to quote the Heritage response to Bloomberg's editors.
This line of reasoning is a red herring, because the number of small businesses paying the higher rates is irrelevant when it comes to job creation. That's because most small businesses don't hire workers.

Most businesses that are classified as small businesses represent the part-time efforts of their owners or are businesses that don't hire workers. They can range from side jobs such as a person selling items on eBay out of his basement to academics conducting studies or giving lectures to doctors and lawyers practicing their professions on their own.
I wrote much the same thing in my post. What matters is that it growing businesses tend to be small businesses, not that only a few of small businesses fit this description. We should be discussing entrepreneurial small businesses, not small businesses overall — a mistake of logic that seems intentional.
When it comes to how higher taxes on small businesses would impact jobs, it is much more instructive to look at the size of the employer-businesses that would face higher tax rates under Obama's plan.

The Treasury study reports that 1.2 million of those 4.3 million small businesses that employ workers would face higher rates under Obama's tax increase. Those 1.2 million businesses earn 91 percent of all the income earned by the small businesses that employ workers.

In fact, a recent report by the accounting firm Ernst and Young found that Obama's plan would destroy more than 700,000 jobs, because the higher rates he calls for would fall on these biggest, most successful small-business employers that employ 54 percent of the private workforce.
I expect any solution to the "Fiscal Cliff" will slow our anemic economic recovery. Punitive measures towards entrepreneurs, however, will have lasting effects well beyond any tepid recovery. When you discourage risk taking, you discourage the creative engine that powers a free market, capitalist economy.

Larger corporations will be shielded from minor changes to tax policies, but large companies are not known for their ability to exploit creativity and discovery. Kodak, Xerox, and IBM famously owned thousands of patents for brilliant ideas and products. Yet, these companies have always struggled to bring their great ideas to market. In large companies, good ideas struggle against current income streams. For small, entrepreneurial companies, new ideas are all they have to win in the marketplace.

Yes, everyone is going to pay more in taxes for the mess created by generations of fiscal mismanagement in Washington and our state capitals. As I've repeatedly argued, I'd rather see proof of spending restraint before paying higher taxes — I don't trust politicians to curtail spending. However, taxes are going to increase in 2013. The question is, will they punish the very small businesses we need for a real, lasting recovery?

Monday, January 7, 2013

NBC: Get Ahead by Skipping Last Two Years of College

Is higher education a good value? Is the education "worth it" for students destined for debt and uncertain job prospects?

I often write about the value of a liberal arts foundation — but that doesn't mean that I believe the most promising career prospects are in the humanities. Students asking me will be told they should focus on science, technology, engineering, and math (STEM), while they also have to be selecting within the STEM fields. Not every science has great job prospects, but I can predict that English and art majors are going to face much bleaker prospects.

My position isn't a contradiction; it is nuanced. If you are going to pursue a four-year degree it should have a solid foundation of liberal arts knowledge. This is because it is unlikely that graduates will remain in a single field throughout their professional lives. The humanities encourage creativity and critical analysis.

But, the traditional university education isn't for everyone. Though I would argue that capable students should have the ideal education — even if they don't appreciate its value until later in life — I also realize that vocational alternatives are important.

I've told students, much to their surprise, that if they are only interested in getting job, maybe they should consider community colleges or certification programs. If you want to fix computers and are going to actively resist art, history, and English courses, then you might as well pursue a technical certification instead of a degree. You can always complete a degree later in life, though being a returning student isn't easy.

New research supports my advice to those students with purely vocational aims.
Get Ahead by Skipping Last Two Years of College?
http://m.cnbc.com/us_news/100345443
NBC News | December 30, 2012 | 11:53 AM EST

Want a solid, middle-class salary straight out of college? Skip the last two years.

A site that analyzes state-level data of how much people earn a year after graduating college found some counterintuitive results: Certain students who earn associate's degrees can get higher salaries than graduates of four-year programs — sometimes thousands of dollars more.

"These numbers and the consistency of these numbers are surprising to me," said Mark Schneider, president of CollegeMeasures.org and a vice president at the American Institutes for Research. CollegeMeasures aggregates anonymized education and earnings data to figure out who earns what after graduation.

Some of its results run counter to commonly-held assumptions. Community college degrees, long considered also-ran prizes in the race for academic achievement, "are worth a lot more than I expected and that I think other people expected," Schneider said.

But there is a catch: You have to earn your degree in a technical or occupational program to earn anywhere near $40,000. That's the approximate average earned by students who went to school and worked in the state of Virginia and graduated with two-year degrees in these fields between 2006 and 2010. Graduates of two-year nursing programs earned an average of $45,342.
Associate's degrees and technical certifications are, generally, much cheaper than a four-year degree. In California, you can complete an associate's degree at some public colleges for $2500 to $3000, as tuition averages $600 per semester. Even in states with higher tuition rates, community colleges cost a fraction of university tuition — and the quality of courses is often excellent. If a student decides to transfer to a university, the associate's degree remains a great bargain thanks to transferable units.

For 2011, the estimated total cost of an associate's degree at the College of Sequoias in Visalia, California, was $4,796. If you complete a basic vocational nursing program or computer certification program, the investment is returned within the first year of full-time employment. You can't make that claim about most bachelor's degrees.
The surprising finding is a comparison of those earnings to what bachelor's degree graduates made, on average: $36,067. 
People with liberal arts and humanities majors didn't even fare that well: on average, grads with political science majors earned $31,184, history majors earned $30,230 and English majors only earned $29,222 a year.

Schneider said this pattern of workers with two-year technical degrees out earning many four-year grads has been consistent across the states it has studied so far.

A generation ago, things were different. Before the recession of 1980-1981, a bachelor's degree of any kind was a ticket to a career that offered middle-class earnings, said Anthony Carnevale, director of Georgetown's Center on Education and the Workforce.

This isn't the case anymore, he said. "It's a system in which you can't just have an ambition to go to college and get a degree. You have to pay attention to the courses and the content of your degree."

"The degree level matters, but a lot less than it used to," he said. "What matters is what you take. Thinking about it as a hierarchy of degrees isn't the way to think about it anymore."
Education has always been "vocational" to some extent, but the value metrics are changing. We need to be honest with students about the financial costs of and returns on a university education. For many, a two-year degree or certificate might be the best choice after high school.

As someone with degrees in English, journalism, and rhetoric, I'm not about to claim we don't need experts in the humanities — but we don't need many professors and researchers in those fields. Having a double-major or pursuing a graduate degree in a STEM field is a great way to expand career options. Technical skills represent job insurance. It would be great to have English and art degree programs filled with students also studying engineering, biology, and businesses.

Myself, I am considering updating technical certifications and maybe some additional credentials. That's not because my English degrees have no "value" — but their value isn't monetary in this job market.

Thursday, January 3, 2013

In 2013, the Top 1% Will Pay Their Highest Total Tax Rate Since 1979 - Business - The Atlantic

The most popular (and unpopular) post on Almost Classical is on the 90 Percent Tax Rate Myth. In that post, I attempt to explain the obvious:
When there was a 94% top rate in 1944-45, there were so many deductions and exclusions that the taxable income was not comparable to someone's entire income. First, the top rate started at $200,000, which today is equal to $2,413,059.90 — so the maximum EMTR would apply only to incomes of $2.5 million. But, that's still taxable income, not earned income. 
In 1944, you could deduct business meals, all business travel, all forms of interest payments, and much more. You could even deduct spousal travel expenses on a business trip! (Why travel alone?) Companies could also "loan" or "provide" almost anything to an employee, from an apartment to standard benefits. It was possible to shelter tens of thousands of dollars from taxable income. Three-martini lunches and expense accounts were important realities, skewing tax calculations. 
As a result of deductions and exclusions, even the theoretical maximum Real Rate of taxation at 60% in 1944 overstates taxation dramatically. The reality? On earned income, the richest U.S. taxpayers paid close to 40 percent of their earned incomes in taxes in 1944. We simply didn't count much of the compensation as taxable income.
— http://almostclassical.blogspot.com/2011/03/90-tax-rate-myth.html
Well, today we are closer to the 1944 effective tax rate than at any time since. We are somewhere between an effective rate of 35 and 40 percent, including all forms of taxes and "contributions" collected by the federal government.

Today, The Atlantic Monthly explains, once again, that effective tax rates are more important than top marginal rates. The new income tax rates will result in the highest effective taxes on higher income earners in at least 30 years. Think about that and then try to claim that "the rich" aren't paying their fair share. The highest wage earners are paying more than they have in 30 years. Now, if we want to argue "wealthy" versus "wage earners" that is a different debate and one I've written about several times.

The new tax rates affect wage earner, not the investor class. On that issue, we do need a serious discussion.

In 2013, the Top 1% Will Pay Their Highest Total Tax Rate Since 1979

By Jordan Weissmann
The Atlantic

After all the months of agonizing, will-they-or-won't-they negotiations, the fiscal cliff deal mostly turned out to be something straightforward: A tax hike on the top 1 percent.

Thanks to the expiration of the payroll tax holiday, all Americans are going to be paying a bigger tab to the IRS this year. But as my colleague Matt O'Brien noted earlier today, the biggest increases are hitting filers with more than $500,000 of pre-tax income, which is roughly the threshold for making 99th percentile of American households.
In fact, it looks like the top 1 percent could end up paying more overall in federal taxes next year than at any time since at least 1979, as shown on the graph below. The country's richest households will be paying a bit more than 36 percent of their income to Washington -- higher than the most recent peak of 35.3 percent in 1995, or 35.1 percent in 1979. 


This chart shows the federal effective tax rate, which is Washington's actual cut of your income. Effective rates matter more than marginal rates. In 1979, for instance, the top marginal tax rate was 70 percent, but it affected very little income, so the average total tax rate for the 1 percent was about half that figure.

The fiscal cliff deal may not have pleased a number of liberals. But at the very least, they can say America's richest families will likely be taxed more than any time since Jimmy Carter was president.

This article available online at:
http://www.theatlantic.com/business/archive/2013/01/in-2013-the-top-1-will-pay-their-highest-total-tax-rate-since-1979/266764/

The excerpt and chart are copyrighted © 2013 by The Atlantic Monthly Group. All Rights Reserved.
Again, I suggest my post the 90 Percent Tax Rate Myth to readers.

Let's pretend the highest earner (not wealthiest person, remember) has an annual income of $100,000. Now, let's set a top marginal tax rate of 90 percent. We will set that marginal rate at $95,000. That means only $5,000 of income will be taxed at the (entirely unreasonable) rate of 90 percent. Everything earned up to $94,999.99 will be taxed at a mix of other, significantly lower, marginal rates. 

Here is my mythical "90 Percent Top Rate" example:
  • First $29,999, let us assume a 0.0% marginal rate. No taxes.
  • From $30,000 to $49,999, assume a 15% marginal rate. That's approximately $3,000 in taxes.
  • From $50,000 to $94,999, assume a 25% marginal rate.  That's approximately $11,250 in taxes.
  • Finally, we have the last $5,000 at a 90% marginal rate. That raises $4,500 in taxes.
  • Total taxes collected: $18,750, or "only" an effective rate of 19% on the example earner. 
A 90 percent rate results in a 19 percent effective rate? Yes. 

Now it should be clear that a 90 percent top marginal rate has minimal effect on tax revenues. Why? Because most "rich" people earn only a small, small amount of their total income in the top margin. Most of our example earner's income, 95 percent of it, is taxed a lower rates. That's by design, since anything else would penalize earning and encourage people to cheat the system (more than some people do). If you know crossing from $94,999 to $95,0000 would have horrible consequences, you would not want to earn that extra $1. That's why we have a marginal rate tax model in most Western nations: it does not penalize your earnings retroactively. 

Most of the high income earners in the United States are within the $200,000 to $500,000 range. So, a higher tax rate that affects $400,000 or more is only going to collect more taxes on the last few thousand dollars these households earn. 

We'll soon see if higher tax rates make any difference to the economy. It might actually help the stock market and the investor class, while hurting wage earners. Stocks will be extremely attractive because investment income is not taxed at higher rates. 

People with $1 million or more of income tend to earn dividend and investment capital gains, not wages. Dividends and gains are not going to be taxed at the higher rate. So, the wealthy will avoid the higher tax rates, but the highest wage earners will be penalized. If I'm a high earner, this is one more reason to ask for stock options and other forms of compensation that are not considered normal wages. 

On a slightly different, yet related, topic: 

If the highest income earners are paying more, and they are in fact paying the greatest share of tax revenues in nearly 60 years, then supposedly low tax rates (a relative myth, anyway) cannot and do not explain the widening wealth gap. Increasing taxes on the wealthy will not equalize incomes — or we'd have less disparity. Many other factors are at play, causing the wealth gap. I have written about the social and technical factors contributing to the wealth gap and will be writing many more posts on why it exists and what we might be able to do about stagnation (and decline) at the lower income levels. 

Wednesday, January 2, 2013

Small Business Is Not a Job Engine - Bloomberg (Part One)

(Part One of Two)

The most productive small businesses might be crushed as part of the "solution" to the "Fiscal Cliff" debates in Washington. For a year, our leaders have known the debt ceiling, sequestration, and other major economic nightmares — all self-inflicted wounds — were set to crash down upon us as the calendar changed.

Raising taxes on "the rich" is a crusade for President Obama and many Democrats. Even more than a few Republicans have tacitly joined the march towards raising tax rates. I'd rather we simplify the tax system, before raising rates, but that's not the topic of this post. The president and some influential voices are dismissing the potential harm caused by narrowly focusing on "the rich" at a level that includes many small and growing businesses.

Bloomberg News, of all places, published an editorial that conflates arguments about growing small businesses and small business in general. It is a rhetorical trick, a slight of hand meant to convince the public (voters) that small business isn't so special — and, even if small enterprises were special, they won't be harmed by the mismanagement of our federal coffers.

Let me explore the pre-election editorial from "The Editors" of Bloomberg, part of a campaign to push through higher tax rates without sufficient cuts or meaningful tax reforms.

Small Business Is Not a Job Engine

[link http://mobile.bloomberg.com/news/2012-10-04/time-to-debunk-the-myth-of-small-business-as-job-engine.html]
Bloomberg
by The Editors
October 04, 2012 6:45 PM EDT

[To] portray small businesses as the engine of job growth is to vastly overstate their role. The argument that raising tax rates on upper-income individuals would harm entrepreneurs is likewise flawed. We love small business as much as anyone. But with the U.S. facing unsustainable budget deficits that will require many Americans to pay higher taxes, it's worth separating fact from fiction.
Sorry, but stating that you "love small business" is a red flag. And anytime someone offers to separate "fact from fiction" always ask which selective facts will be used and which fictions are being challenged. Expect fallacious arguments aplenty in taxation debates.

Let's get to the core of the Bloomberg nonsense.
First, small businesses destroy almost as many jobs as they create. Second, only about 3 percent of small-business owners fall into the upper-income tax brackets that would increase if, as Obama has proposed, the Bush tax cuts are allowed to expire. And third, many businesses counted as small aren't engaged in traditional small-business activity. Instead, they are partners in hedge funds, law firms and private-equity shops, or they are highly paid actors, athletes, speakers and authors.
1. Small Businesses are Job Destroyers

Small businesses destroy jobs? Sorry, but that's a misreading of several studies. Small businesses earn less and pay less per employee, so they do have a smaller effect on economic activity than medium and large enterprises. Yet to assume they "destroy jobs" is to assume the jobs created by small businesses would be shifted to larger firms, magically. More likely, the owners and employees of many small businesses would be unemployed or underemployed. Small businesses take chances and fill niches larger firms tend to ignore.
[Once] most startups pass the five-year mark, they destroy more jobs than they create.

University of Maryland economist John Haltiwanger found, for example, that small mature businesses have "negative net job creation" and that the bigger contributors to job growth are startups, which account for roughly 3 percent of employment in most years.

Alan Viard, a resident scholar at the American Enterprise Institute, says the argument that small business creates jobs "does not stand up under scrutiny."
The Bloomberg editors apparently didn't read the Haltiwanger report closely. As the Wall Street Journal clarified:
The paper—co-authored by University of Maryland economist John Haltiwanger and two Census Bureau economists—confirmed that small businesses create more net new jobs, per employee, than do bigger businesses.
http://online.wsj.com/article/SB10001424052970203914304576630973840478808.html
Consider a simple example: There is still a market for saddles, but not a large market. Horses are used by the military, police forces, ranchers, and athletes. There isn't a huge market for equestrian supplies, yet there is a market. A large global conglomerate is unlikely to replace a small business specializing in saddles and other equipment. The small business making saddles might not fill a huge need, and it might not create millionaires, but it offers a job and a living wage to its owners and any employees.

How many small businesses are unlikely to be replaced by larger firms? Many service industries, for example, resist being "corporatized" beyond franchises and cooperatives. Hair stylists, tutors, yoga instructors, dog walkers, and many others are not going to merge their small businesses into massive corporations. Some businesses are small, often one or two people, and they will remain small. It is also true that such businesses do not create jobs for many additional employees. These are sole-proprietorships that give purpose to many individuals. That is part of capitalism: being free to choose a path, defining "success" for yourself.

While many small businesses will never expand to employ hundreds or thousands of people, the companies that eventually do employ large numbers and generate significant revenues begin as small firms.

The Editors offer a non-sequitur of sorts, arguing that small businesses don't create jobs, yet the businesses that do create jobs are generally smaller. Yes, not every small business is growing, but most growing businesses are small — so by definition most dynamic growth is within the ranks of small enterprises.
[Recent] economic research shows that small companies play no greater role in job creation than large ones do. What matters more is age: New businesses account for the biggest share of job gains. Those companies tend to be small yet unprofitable. They would be largely unaffected by an upper-income tax increase.
Nobody founds a 2000-employee company, at least not since the Industrial Revolution. Today's new businesses are likely to be knowledge-based firms, such as tech start-ups and specialty engineering firms. You don't need more than a dozen or so people to create software or plans for a new product. Labor-intensive manufacturing tends to be outsourced, especially by smaller companies that focus on new ideas.

Coming up with new ideas, or serving shrinking markets, is risky. You have to be the best of the best. Larger firms don't like such risks. Of course, there is a price to taking chances and many, if not most, small businesses do fail. The entrepreneurs I know have founded many small businesses, with some failing and others growing. If the Bloomberg editors consider such "churning" destructive, they are reflecting a serious distrust or misunderstanding of a basic underpinning of our free market system. Creative destruction allows the market to discover which new ideas will grow and become the foundations for big business in the future.

Small businesses are the great places of experimentation and creativity. That's Capitalism 101.
[Many] don't last long. For instance, employers with fewer than four workers have accounted for roughly 5% of all private-sector workers since 1992, but 15% of all job creation and 15% of job destruction in the private sector in that period, according to BLS.
http://online.wsj.com/article/SB10001424052970203914304576630973840478808.html
Small businesses with fewer than four workers are only five percent of the labor market. Some of those firms will grow and employ dozens or hundreds. Others will fail. The smallest of new businesses matter because the handful that do find the sweet spot in the marketplace will become medium to large companies.

2. Only Three Percent of Small Business Owners are Upper-Income

So what? Those three percent are the job creators. They are the innovators.

Once you suggest "only" a small group will be affected, and those are "the rich" anyway, the populist rhetoric red flag waves. This is the president's argument that most small business owners aren't rich, and won't be affected by any higher taxes. We can dislike the rich, while not disliking business owners (until they are too successful).

New businesses are more likely to be unprofitable, yet they also tend to jump from "nothing to something" instead of climbing steadily through the income brackets. The new businesses also tend to experience much greater swings in revenue and net incomes than larger firms, since a few thousand dollars is a lot of money to a sole-proprietor. New enterprises are experiments, with all the unpredictability that entails. You search for good ideas, testing many things to build a successful firm.

The early years of most businesses are lousy. They are sleepless. And yet,

A friend of mine helped create a smartphone application. The app was popular for a time, creating a windfall. And then, almost as quickly, the app slipped off the best-seller charts. Some products are prone to trends: you either catch the wave or not, and the wave ends. Another acquaintance in the software industry wisely understood the trend-based nature of industry. He is always looking for the "next big thing" in online gaming. Earnings from one success are used to invest in a half-dozen other ideas, and most of those do not succeed. Boom. Bust.

I am an entrepreneur by nature, compelled to try one idea after another, working non-stop to discover that one idea that will elevate us into the ranks of the rich. I'm not about to apologize for wanting to have a successful idea.

My wife and I have co-owned a computer store, a bookstore, and our little freelance business. The computer industry changed. The publishing industry changed. Entrepreneurs are always racing to stay ahead of trends. We are always hoping to be ahead of the trends, working and worrying constantly. I've met few entrepreneurs who "relax" easily. They are people always on edge, optimists with a sense of impending doom. Most small firms don't survive, yet entrepreneurs keep at it.

Small businesses are always one event, one bad moment, from failure. Even established small businesses experience volatile incomes. Consultants and freelancers have great years, and bad years. Farmers know the boom-and-bust cycles better than most business owners. For these business owners, a year over $250,000 can be followed by a year of losses. Ideally, you hire an accountant and exploit any and all tax provisions that allow you to shift losses and expenses. You do all you can as a small business owner to reduce "net income" — something larger corporations employ armies of tax attorneys and accountants to do.

Being self-employed means accepting that the tax code, like most laws and regulations, are stacked in favor of the larger corporations. Yet, there is something about taking responsibility for yourself that makes proprietorship attractive to some of us. It is that legal standing as "sole-proprietorships" and "subchapter S corporations" that causes small business owners heartburn during the current tax "fairness" debates. When you are a business of one, you tend to file taxes in a way that treats the entire business as "personal" income and expenses. This is done to avoid the costs of forming a complex corporation and then paying yourself a salary. In effect, business incomes "pass-through" the personal tax filings of entrepreneurs.

At least Bloomberg's editors understand this basic fact of life for small business owners.
Two recent reports by Ernst & Young LLP… concluded that pass-through companies accounted for almost 95 percent of all business entities in 2008 and employed 54 percent of the private-sector workforce.
Read the above several times. Ninety-five percent of businesses file taxes as individuals, either as sole-proprietorships or subchapter S corporations. Medium and large businesses, which employ 40 to 46 percent of workers, are only five percent of all business entities in the U.S. tax system. All but five percent of businesses are small businesses and file taxes in a way that leaves them vulnerable to oddities in the tax code.

From my earlier points, recall that most small businesses have no or few employees and are destined to remain "small" by choice. There are also regional differences in what the self-employed can earn: a consultant in New York, Chicago, or Los Angeles must charge (and earn) more than a similar consultant in a rural town. I recently compared hourly computer repair fees where we live in Western Pennsylvania to fees in Los Angeles, trying to set my own consulting rates to the market. I can charge about half the rate of a "big city" consultant, it seems.

But, I certainly do want to be in that top three percent. I'd love to establish a clientele that recognizes my value as a technologist. If I do someday earn $250,000 a year, I certainly will have employees and seek to expand in some way. My desire is to create a growing and respected business — with some financial payoff. Building a business means making a lot of sacrifices. It also means "bouncing back" from the various failures of the past. Success in business is seldom easy and rarely unearned.

Financial success results from planning, hard work, and a bit of fortune. It takes a special character to build a businesses, enduring any number of personal and professional challenges. I've written about what makes the successful different before: they really do work more hours and take more chances than others. So why do we punish the very people that might create the best ideas?

At least the Bloomberg editors admit that the three percent includes the entrepreneurs creating the jobs. You create a good idea, you create a growing business. That business, in turn, creates jobs and economic growth. No, those jobs won't pay more than jobs at larger corporations — and there is always the chance of sudden failure — but these are the jobs that drive capitalism.
True, most small-business wealth is accumulated at the top. The 3 percent of filers with pass-through income in the upper brackets account for half of all pass-through income. Owners of small businesses that employ workers are also more concentrated in the top two brackets — accounting for 10 percent of owners — supporting the argument that a tax increase would cost jobs.
Consider the above facts carefully: the top employers are concentrated in the top two tax brackets. Of course they are, since you need profits and growth to pay employees. The men and women with the best new business ideas are rewarded by the free market. Increasing taxes on productive entrepreneurs will reduce the amounts they invest in employees, materials, and other costs associated with expansion.

3. Many Small Businesses Aren't Really Businesses

Recall that The Editors dismissed many small businesses as not being sufficiently bound to traditional perceptions of small business:
And third, many businesses counted as small aren't engaged in traditional small-business activity. Instead, they are partners in hedge funds, law firms and private-equity shops, or they are highly paid actors, athletes, speakers and authors.

Some of them are very profitable, but a large number aren't what most of us would consider a small business, such as a dry cleaner or coffee shop.
I'm a freelance writer. I'm a public speaker. I'm a computer consultant. While my wife and I have had small retail businesses, my current endeavors don't require retail rent or employees — at least at this moment. Does that mean my "small business" doesn't contribute to the economy?
Just 20 million of the 34.7 million filers reporting pass-through income qualified as a small business, Treasury said. Of those, about one-fifth qualified as an employer.
To be clear, the editors at Bloomberg complain that "just" 58 percent of pass-through businesses, those sole-proprietors and subchapter S corporations, are truly "small businesses" by one definition. Worse, horror of horrors, most small businesses — mine included — have no employees!

As a writer and a tech consultant, I need a computer. Actually, my wife and I have three laptops, two desktop computers, and a tablet. We have a network router, five or six switches, two laser printers, and much more. Our work requires "tools" and those tools were purchased from companies that employ other people. Even a business of one or two people creates economic activity, and therefore supports jobs.

Profits I earn are likely to be spent on services and products that employ other people. Simply because I do not have employees does not mean that my wife and I do not hire any number of specialists to provide services. Our spending supports jobs, including those of other small business owners and their employees. And, as I've stated, I'd love to have an idea that takes off and ends up requiring a growing staff of employees.

I would rather not be hiring the services of accountants, lawyers, and tax specialists. It often seems that Washington tax policies are meant to stimulate jobs for the tax-avoidance industry.

My wife and I are in the top 10 percent, and I darn well hope we eventually land in the top one percent. We've worked hard and we've endured a great deal. When we've failed, we've picked up ourselves and started over on the path towards whatever we could achieve. We didn't give up when we had nothing: we set about becoming "something" again. Having nothing, being truly poor, was miserable — and that is part of what drives me to keep searching for new ideas.

That is what makes "small business" special: the people behind those businesses. We are driven. We don't give up and settle. We take risks, even after failing. We are a job engine simply because we work, almost no matter what we have to do to earn the next opportunity. If we have to work seven days a week, we do. If we have to skip vacations, we do. We are producers — and consumers.

That consumption might be curtailed, thanks to Washington's ineptitude. Like most entrepreneurs, I'm going to be cautious in the new year. I'm going to take fewer risks and I'm going to divert more funds into various tax-sheltered savings options. If I don't take risks, I'm less likely to stumble into an idea that will propel us towards needing employees.

Concluding Thoughts
The U.S. faces a serious financial shortfall that will require many Americans, including the wealthiest, to pay higher taxes. Republicans can argue against tax increases for many reasons, but hampering small business isn't one of them.
http://mobile.bloomberg.com/news/2012-10-04/time-to-debunk-the-myth-of-small-business-as-job-engine.html
If you want the wealthiest, which includes many entrepreneurs, to pay more in taxes, first demonstrate some serious spending restraint. I fear that any new tax revenues will simply become new spending… and that new spending will outstrip new revenues as has happened repeatedly over my lifetime. Government projections will prove wrong (as usual) and yet more revenues will be demanded of the people most likely to create jobs.

Bloomberg's editors are right that most small businesses do not create the majority of jobs. But, the handful of small businesses that are new, innovative, and successful are the engine of job growth. That one-in-ten small business with the right idea behind it might become the next Apple, which has been "near-death" more than once.

It should not matter if only a fraction of small businesses create the new jobs — what matters is that we do everything possible to encourage entrepreneurial thinking and risk taking.