Read Globally, Tax Locally

Imagine my surprise.

I was sitting in the lobby of an elegant hotel in Florence, Italy enjoying a glass of wine, listening to a pianist who could make his grand piano sound like an entire orchestra, and reading the International Herald Tribune.

On the front page was an attractive woman, a chiropractor, wearing a forlorn expression. She lives in McLean, Virginia, the Washington, DC suburb where Ted and Bobby Kennedy lived and where finding a condo or house for less than $1 million (or $2 million) is challenging.

She and her husband were worried that taxes on their taxable income above $250,000 might increase by 3.6%. They were wondering whether to close their practice temporarily and take a vacation to avoid higher tax rates that might take place next year.

I thought, “Huh?” until I saw the next paragraph quoting a friend of mine – let’s call him Edward. Edward owns a successful company that his father started 60 years ago. His parents and he have contributed deeply to the fabric of Salisbury, Md. Edward is a really smart guy with a great education. He worked with one of the nation’s largest financial institutions before returning to the family business. He has testified before Congress, served on national boards, and written articles in Washington newspapers about the hazards of regulations and taxes.

Edward said that he wanted to hire four new employees but that he was only going to hire three because his tax bill will increase $100,000 if the Bush tax cut expires.

Come on, Edward. You know better than that. First, an employer hires a new employee only if that employee produces more than he costs. If a new employee’s salary is $50,000, an employer will only hire her she produce at least $50,001 in benefits.

Second, taxes are admittedly complicated. I was a college professor for almost 40 years. Student often thought that “saving taxes”’ was the answer to any question about corporate strategy.

I’d ask, “Do you have $1.”

“Sure.”

“Give it to me.” The student would hand me $1. I’d give him 35 cents, put the $1 in my pocket, and say, “Thanks.” Then I’d ask the class, “Anyone else want to trade $1 for 35 cents?” No one would. No one trades $1 for 35 cents. Students always asked for their $1 back. “No,” I’d say. “That’s the best $1 you’ve spent on your education.”

Edward must be earning over $3 million per year. Here’s the math: how much income multiplied by 3.6% equals $100,000? The answer: over $2.75 million. Since Edward’s taxes won’t increase on his first $250,000, his net income (after expenses) must be over $3 million.

Edward is undoubtedly a terrific businessman. He probably doesn’t want the world to know that he’s making over $3 million per year. But if his taxes are really going up $100,000, he is.

Come on, Edward. Hire that fourth employee. If he’s good, he’ll make you more money than you pay him. And if you’re netting $3 million, you can afford it.