The Bay Area is full of entrepreneurs. There’s something in the air that creates an almost godly electric spirit that causes people to work hard and innovate. As 2011 nears, more and more I hear about how small business owners are clamping down in preparation for next year’s tax hikes. Clamping down is generally not a good term to use if you are a politician who wants to create job growth.
Let’s say you make roughly $3 million in annual gross revenue from your internet business like my friend Zach does. Not bad, but not exactly big money if you take into account his cost structure. If his pre-tax operating profit margin is 25% after he pays the salaries of all his employees, the rent, and so on, Zach is left with roughly $750,000 subject to taxes. If his tax rate goes up from 36% to 39.6%, for every dollar he makes over $375,000, he will pay roughly $25,000 more in taxes a year in 2011.
Well guess what? My friend is letting go of one of his junior programmers who makes roughly $85,000 to pay for next year’s $25,000-$35,000 tax increase! My friend feels bad letting his 2006 college graduate employee go, but he has no choice since revenue has declined since 2007, and the government is tightening the screws. Zach believes that 2011 revenue will be worse next year than this year, and is budgeting a decline. Thank goodness for 99 weeks of unemployment insurance! And no, it’s not reasonable for the junior programmer to just go work in fast food after only several weeks of looking.
DON’T LISTEN TO THEIR LIES. THEY AREN’T IN IT FOR YOU.