Is the Tax Debate just Political Hype?

 (An internet search of “income tax breakdown of who pays” brings back 240,000,000 WebPages.)

I would say it is. The old adage the figures lie and liars figure holds true here. The entire debate is around collecting votes not improving America. First let’s look at the figure and then look at the strategy. The top 1% of the wage earners in America pays 40.4% of the total tax revenue bill. The bottom 50% pays in only 2.9%.  Forty-five percent of the income earners pay no taxes at all. This rate has been relatively constant since the late 90’s. The variance is about 1% - 3%, give or take. Changes in tax policy don’t seem to affect the actual outcome by much, if at all. This makes it look like the top 1% is being screwed. However, the top 1% only pays at an average rate of 17.6% of their income. This is partly due to the maximum capital gains tax rate of 15%, which brings down the average. The Bottom 50% pays at 17.1% of their income.  75% - 80% of the taxpayers pay more in payroll tax then income tax.

Most studies don’t take into consideration total government tax burden of local, state, and federal taxes, including payroll tax, which constitutes another 10% of the income of the bottom 50%. The real burden on the poor is not the Federal Income Tax system. It’s all of the taxes paid to all government organizations. This 10% does not include sales tax, advalorem tax or property tax (that is included in their rent if applicable). Their 3% federal tax contribution can quickly balloon to over  20% when all taxes are included.

Total share of actual income for the top 1% is only 22.2%. The total share of the bottom 50% is around 12%. Therefore, the rich are paying twice their share in taxes while the poor are paying a third of their share. This seems like a just system, if not totally fair. We have accepted this as the American way for several decades, nothing new for several election cycles.

Here’s the real issue… The group that contributes only 3% of the total tax revenue represents potentially 50% of the voters. This group by the way is growing, up from 40% in 2007. A candidate is not elected through tax revenue; they are elected via the ballot box. If a politician can run on a platform of reducing low income taxes by 33% (real impact is a reduction in tax revenues of 1%) they can garner the allegiance of 50% of the voters. Similarly, that same politician can berate the wealthy as living off of the backs of the poor and only lose 1% of the voters. 

Here’s the rub… the 1% can donate a lot of money to the election coffers of the politicians. The reality is that politicians don’t need the voters. If only three votes are cast and they get two of them, they win. In most cases, there are only two candidates for the voters from which to choose, one from the Republican Party and one from the Democratic Party. These parties provide the majority of the funding to run the election campaign. The politician’s allegiance is to their party, not the voter. The can get by without winning over the majority of the voting age population, but they can’t get on the ballot without the support of their party. Rich people know that changes in the tax code doesn’t bother them. They have a staff of smart people that will help them deal with it. The not so rich (PC statement) don’t have the staff. 

The top 1% understands political rhetoric, the bottom 50% may or may not. Either way the bottom 50% gets more money in their pockets even if nothing in government changes.

The Ripple Effect

Yesterday Rodney King passed away. His 15 minutes of fame came back on March 2, 1991. What brings this to mind is the tragedy of the situation. Rodney King was an ordinary man. Like many ordinary people he lived a life that put him in an extraordinary circumstance.  We see this quite often in life. People living their ordinary lives, then faced with a circumstance that they didn’t seem prepared for. Mostly we hear of heroism, these ordinary people pulling strangers out of wrecked cars or burning buildings.

Rodney King did not wake up the morning of March 2nd thinking that this day would be dramatically different than all of the others. He had no idea when events finally played out fifty-three people would lose their lives. Rodney’s part on this was very small. Through his actions, he simply made himself available. ( the same could be said for the police officers involved)

Rodney embraced a life of alcohol and drugs. He was defiant, living for today. He was on a trajectory of failure. He was convicted of armed robbery in 1989, serving one year of a two-year sentence. By the time he hit the lime light in 1991 he was 26 years old, twice divorced and the father of 3 children.  Just prior to his confrontation with police, his alcohol level was two times the allowable limit. Had this moment in his life not happened, we would have still read about him in the papers. We just wouldn’t have noticed.

On that March day, Los Angeles police overreacted to a simple situation they had been through many times. Their actions propelled Rodney into the lime light and a new trajectory. One that he was not prepared for and more than like would have liked to avoid. Rodney was driving a car being chased by the LAPD at speed up to 80 mph. When stopped by several police cars and at least one helicopter, his passengers surrendered without incident. Rodney started acting strange. He made a move that officers interpreted as aggressive. He later stated that he ran because a DUI would void his probation and send him back to jail. This was the extraordinary circumstance. This was the point that Rodney’s life and the lives of several people would be changed forever. This one decision, we all make them, most go unnoticed. 

 Rodney was tasered and struck at least 56 times with batons. George Holiday caught all of this on video. Video that would be used at the trial of the officers involved. The officers were tried in state court and found not guilty of criminal conduct. The outcome of the trial that ended on April 29, 1992 was the catalyst for the riots that started right after the verdict. Fifty-three people were killed in the riots. Twenty-three hundred and eight-three people were injured, there were around 7,000 fires and 3,100 businesses were damaged. It all happened in the very neighborhood of the rioters. They burned their own neighborhood down. Two years later, Lawrence Powell and Stacey Koon were convicted in Federal Court of violating Rodney King’s civil right and sentenced to 32 months in prison.

Rodney spent the next twenty-two years in notoriety, both a reluctant symbol of the civil right struggle and the catalyst of anger and rage. Our message today… when we get up tomorrow morning we will not know the ripple effect of our actions until they are complete. Are we living a life that could lead to positive or negative reactions? Are we one road rage away for notoriety?  Are we one text message away from multifactorial events that will change lives forever? The lives of people we don’t even know. Neither the police officers or Rodney knew the people lost in the riots, yet each had an impact on their lives and the lives of those who did know them.

Don’t Lie to Yourself

I look at literally hundreds of Income Statements for small businesses monthly. As a company, we do comparative analysis of these to have a better understanding of best practices for our clients. I find an extremely disturbing trend among many of them; I would even say the preponderance of them.

The core of our practice is not tax accounting. It is operational accounting, using accounting information to make better business decisions. Most of our clients are under the $5M range. Many of them have revenues below $1M. Making good business decisions is incredibly important to them. They generally don’t have the safety net of large amounts of collateral (inventory, receivables or capital assets) to leverage into cash during down times. Managing their business on a daily basis is mandatory. It’s not a luxury. There is no room for big or repeated mistakes. These will make their lives miserable at best and close them down at worse.

In spite of this urgency for creditable information, most provide only lip service to their accounting. I won’t get into the challenge of getting timely and accurate answers today. This is an ongoing problem for busy business owners. But I do want to address the incredibly inconsistent and sometime illogical approach used by most small business when it come to capturing financial business information. All small business people inherently know that there are certain expenses that happen every month. There is rent, utilities and payroll. If you are a franchisee, there are royalties and national advertising fees. Whether you have actually paid these bills or not, you owe them. They are a drain on your profitability. They will eventually be a drain on your cash. Not posting them to your accounting system doesn’t make them go away. That liability still exists and needs to be dealt with. Not posting them distorts the view you have of your performance. It hides problems that will come back to bite you. Just do it and do it every month.

This is the obvious part and it still happens, what about the less obvious business practices that skew your financial view? Your Chart of Accounts (the way you itemize revenue and expenses) doesn’t match the way you do business. What do I mean by this? Most small businesses use the Chart of Accounts that came with the software and made simple changes. For example, Cost of Goods Sold (COGS) is unique for most businesses. A business may start with the Chart of Accounts for their industry and modify it for their particular business. You don’t want to start with the Chart of Accounts that came with the software because it doesn’t fit the way you do business. It actually doesn’t fit any business, it’s just an example to get you started. This is true for labor cost, inventory and other items you manage on a daily basis. If you have a service business, you really should go to some level of job-based accounting so you know what jobs are profitable and which aren’t. You can’t sell at a loss and make it up with volume.

The bottom line is that we have seen very few new clients that didn’t think their accounting was at least in the ball park. We have had very few new clients that we didn’t have to perform extensive re-coding. We’ve had clients that we had to go back as much as 18 months to clean things up. These good, intelligent people run good businesses. It’s not about their intelligence, drive or commitment to their businesses. Their forte is not accounting. Their accounting never told them anything about running their business so they didn’t expect it to. They wanted to make sure they didn’t overpay taxes, that was about it.

I can’t help to improve some of the businesses I talk with because their numbers don’t make sense. We had a client that sold more products then they brought into inventory every month for as long as they were clients. We’ve had clients that’s COGS exceeded sales. We’ve had clients that posted negative payroll during periods. We helped them identify the problems and in most cases solve them. Some of them decided they didn’t want to fix the problem for personal reasons. They’re not clients today. That’s a liability we weren’t willing to accept.

If I can leave you with one message….Never lie to yourself…. You deserve better…. Understand the truth about your business. Initially it may be uglier then you thought, but it is the only way to get better. If you don’t feel you have either the objectivity or skill set, bring in a third party. The truth will set you free…..

Why would my employees care about me?

Over the last 40 years of running organizations, I have come to understand why some managers are so autocratic in their management approach. It’s simple. They do a very poor job of hiring the right people. They may be good at assessing job skills and cultural fit, but most are extremely poor at assessing professional motivation. Why is that important?

I have long ascribed to the wisdom that people who care about you will work harder for you than people who fear you. The employees I have had that were more concerned about appeasing my wrath, did what I wanted, when I wanted as long as I was around. When I wasn’t there, they either used it as an excuse to do nothing, or were so in fear that what they did would dissatisfy me, they did very little. The employees who cared about me as a person, not just as their boss, wanted to do things that made me look good to others. They generally took this approach without supervision. They took the time to understand what was right and worked hard to do it. They made mistakes, but they learned…… the other group…made mistakes but never learned because their only real motivation was to keep me off their back……

Why would my employees care about me? Simple, I cared about them first. I wanted to see them get ahead. I wanted to see them become more valuable, either at their current job, if possible, or at another company if it was the only way. Most managers found this counter-intuitive. Why would I build up an employee just so they would go to work elsewhere?

Several reasons… Who wants an employee that doesn’t want to improve their value? Is it just a job, or a profession? They may not want a promotion, but they surely want to work smarter not harder….. An employee who feels they are acquiring a skill that will eventually make them more valuable will work harder and for less pay. They will see it as “Paying Tuition” for an education that will pay dividends down the road. If they are the right employee, they will know if the company has an opportunity for them to advance. If they know there is no real opportunity where they are, then they will sneak around to get the skill because they will be concerned their current employer will sack them if they find out. You have to get that off the table. If they are good and there is no growth opportunity where they are, they are going to leave. You can’t stop that. You should be concerned with what they are willing to achieve while they are at their current job. Be open and honest about their career path. Care about them first. Help them get to where they want to be.

What if they are not the right employee? That is, they have no desire to improve their value. They don’t care if you care about them, because they really don’t care about themselves. There is no point in micromanaging them, or being authoritative in your approach. This is a short-term solution, which enables a counterproductive behavior. Let’s face it, these people are gone, it’s just a matter of when. Don’t argue or fight with them. Don’t get frustrated. Replace them as soon as you can. Replacing an employee is an easy task that just takes planning. After several attempts to get them to take an interest in themselves, put them on a specific performance improvement program (PIP) with deliverables and target dates. Make it objective so there is no wiggle room. They hit the targets or they don’t. The PIP should clearly state the actions to be taken if they don’t make the targets.

If you take this approach a couple of other things will happen… the good employees won’t tolerate the poor employees and want them off the team…. Prospective new employees will want to work for you not just because of the opportunity at hand, but because they will have heard that you will help them enhance their careers. You get and keep better employees.

The micromanagement authoritarian approach gets you sleepless nights, pent up frustration, unresolved anger and poor results. The control freaks out there…. A big part of the fear of losing control is believing that no one has your back. You tell yourself that you are the only one who cares enough and is smart enough to get the job done. And if the job doesn’t get done you’re the one that suffers… Get professional help…. you may have just built your own dilemma by the way you manage others… they don’t care about you and want to see you fail…. You’re not paranoid…..

Here are great follow-up articles to read….

Forbes Hire for Attitude

Harvard Business Review