Once again, a "well intentioned" tax policy has created headaches for entrepreneurs. Inc.com reports about the impact of the so-called millionaire's tax on unsuspecting entrepreneurs. It basically adds another layer of progressive tax on high incomes.
"In New Jersey, roughly 28,000 of the state's high-income residents now pay an extra 2.6% on every dollar they earn over $500,000 annually. Former governor James McGreevey championed the tax as a way to refund property taxes to the state's middle-class homeowners. In similar fashion, California voters passed a ballot proposition in November that tacks an extra 1% tax on every dollar that individuals make over a million, to help fund the state's mental health services. New York, Vermont, and Ohio also have specific taxes for high-wage earners."
The problem with these laws, beyond the inherent flawed logic in progressive taxes in general, is how it impacts pass-through entity owners, such as S-corps and LLCs.
"The problem for S corporation owners and LLC partners is that although they record the profits from their business on their personal returns, most of that profit is on paper only, as the bulk gets plowed back into buying inventory and making capital improvements. 'It hurts us to find the additional cash to pay the tax,' says A. Michael Candido, president of J. Moore & Co....(T)he tax will probably cost the company an additional $30,000 a year -- money Candido says could have been used to hire office help, to upgrade the firm's computers, or to pay health care premiums, which jumped, coincidentally, by the same amount."
