By: Jennifer Hice
on Wednesday, June 08, 2011
A recent analysis by USA TODAY concluded that following a recent cut to Social Security tax stemming from a December 2010 budget deal between Republicans and Democrats, Americans are currently paying the smallest share of their income for taxes since the 1950’s. In fact, the total tax burden, which includes all federal, state and local taxes, dropped from 27% to 23.6%, further signifying the impact of government tax cuts and a weak economy.
What exactly does this decrease in taxation mean for you and your small business? What impact will this dip in the tax burden have on the average American and business owner? At first glance, the numbers seem somewhat surprising. It’s important to understand that USA TODAY’S analysis was not limited to personal income tax only. It examined the full range of taxes that individuals pay to all levels of government, including Medicare, Social Security, property tax for schools, etc.
Simple math tells us that by paying the government less in taxes, a greater amount of money will remain in our pockets. In the short term, this is obviously a huge win, as the reduction in taxes will surely put more money back in to the hands of consumers, which will go a long way in stimulating the economy.
However, a reduction in taxes must be viewed from both sides of the fence in order to gain proper perspective. Simple math assists again, telling us that the less money Americans pay in tax translates into less funding for the U.S. government. This is especially concerning, considering the fact that the government has been struggling to meet its financial commitments for quite some time.
Robert Bixby, executive director of the Concord Coalition
, a deficit-reduction advocacy group, described this complex issue best when he said, “We have a 1950’s level of taxation and a 21st-century-sized government.” Just because Americans will benefit from a momentary tax break in the short-term, doesn’t mean they will remain protected from the fallout of the government’s long-term financial problems.
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As a country, we are perpetuating a vicious cycle: spend more, borrow more and pay more interest; spend more, borrow more and pay more interest; and so on and so on. By habitually continuing this pattern, more and more of what we pay in taxes simply goes to service our mounting pile of national debt, further crippling the government’s ability to provide necessary services.
The lesson here is one of balance. This lesson can be applied to the financial practices of small business owners, as well as to the financial practices of the U.S. government. Regardless of how much money is being managed, one must work diligently to maintain a balanced income to debt ratio. Small businesses, big businesses, little governments and big governments alike will all have the need to make large purchases outside of the scope of their current rate of income, requiring them to borrow money in order to attain. With that said, credit, when used appropriately and responsibly, is a great resource and must be properly managed and respected. Conversely, when credit is mismanaged, individuals, businesses and even governments can quickly sink into a dark sea of debt. Bottom line, we must make smart financial decisions and evaluate what kind of debt we incur, how much we can afford and determine how we can pay it back in a reasonable amount of time.
Small business owners need to operate within the bounds of their budget in order to service the debt they have chosen to incur on behalf of their business. If their debt ratio gets too high, they run the risk of not being able to service their debt, especially during times when revenues drop or expenses increase. This is essentially what’s happening with the U.S. government and the country’s lowered tax levels. The government has amassed an amount of debt it is unable to service
, while simultaneously attempting to manage an increase in expenses, all during a time when it is experiencing a massive decrease in “revenue” as a result of American’s having to pay much less in taxes. As such, it is not entirely correct to suggest that the current dip in America’s tax burden is as positive as it may seem.
While there are never any guarantees in life, financially or otherwise, there is still a big difference between calculated risk (smart financial decisions and proper use of credit) and foolish risk (poor credit management and poor financial decisions). The trick for any business (or government) is to hit the right balance for their specific set of circumstances.