Conflicted support

guest commentary by David Potts

I just finished reading the transcript of the President’s State of the Union Address. I wasn’t able to watch it on Tuesday night due to a scheduling conflict. There is an advantage to reading the transcript over watching the speech live. When you read the transcript you don’t have to put up with all that annoying applause.

After reading the transcript I thought the President’s speech was a great speech, a speech that would motivate me to get behind the President and Congress and support their initiatives — if I wasn’t such a cynic. Let’s review a sampling of what he said and what I heard.

The President said, “We need to take responsibility for our deficit and reform of our government.”

I believe in personal responsibility and I believe our government needs to be reformed. But who did President Obama mean by “we”? I feel confident I will be included in the taking responsibility for our deficit with the opportunity to pay higher taxes in the near future. However, I sincerely doubt they will ask my advice on how to reform the government. I can’t afford access to Congress much less the President. Lobbyists are expensive.

The President said, “Our free enterprise system is what drives innovation. But because it’s not always profitable for companies to invest in basic research, throughout our history, our government has provided cutting-edge scientist and inventors with the support that they need.”

Here the President seems conflicted. The reason free enterprise drives innovation is the concept of risk and reward. If a person is willing to risk his time and money to invent something, he is rewarded with large profits if the market accepts his invention or innovation. Profit is the motivation to invent and innovate. But the government would rather tax me and spend and waste the money I could use to invest in innovative companies to finance their pet projects (usually as payback for political support).

I did a term paper in 10th grade on the then “current oil crisis.” It was 1973 and OPEC had imposed an embargo on exporting oil to the United States because of their support for Israel. Experts then believed that since oil was a limited resource, we would soon run out of oil by the year 2000 or so. However, the oil companies, through innovation driven by the expectation of profit found new ways to produce oil and to discover new oil reserves. They were successful because they were innovative and took risks.

But today President Obama revealed his animosity toward the oil companies. President Obama said in his State of the Union address, “We need to get behind innovation. And to help pay for it, I’m asking Congress to eliminate the billions in taxpayer dollars we currently give to oil companies … they’re doing just fine on their own.”

When I hear this statement I hear him saying “let’s get behind innovation and risk taking by taxing innovation and risk taking.” And I see a little deception going on in the President’s statement. Taxpayers don’t give the oil companies billions of dollars. They were given certain tax deductions as an incentive to find additional oil and gas reserves in the United States … and it worked.

Education is always a biggie for a State of Union Address. As always we need to fire the bad teachers and reward the good teachers. It’s a shame you can’t fire bad parents. But in this year’s address the President said, “We need to teach (our kids) that success is not a function of fame or PR, but of hard work and discipline.”

I couldn’t agree more. But motivation is required to work hard. When the consequence of working hard to improve your way of life includes an increasingly higher proportionate income tax, where do you find this motivation?

But what am I worried about? President Obama has promised in this year’s State of the Union Address to fix the income tax code. He said, ”For example, over the years, a parade of lobbyists has rigged the tax code to benefit particular companies and industries.”

That’s true. How is that going to be any different now? Remember how much money lobbyists spent making sure the health care reform legislation benefited their clients? The President continued, “Those with accountants or lawyers to work the system can end up paying no taxes at all.” As an accountant I would say that isn’t working the system, that’s complying with existing tax laws that expensive lobbyists have paid Congress for.

Of course you need to exclude small businesses from this grouping where a combined self-employment tax and Federal and state income tax rate can reach 37% before they reach profit of $50,000.

“But all the rest are hit with one of the highest corporate tax rates in the world.” Yeah, due to wasteful and excessive government spending Congress needs to maintain political power.

Let’s keep going just a bit more. The President continued, “So tonight, I’m asking Democrats and Republicans to simplify the system. Get rid of the loopholes. Level the playing field. And use the savings to lower the corporate tax rate for the first time in 25 years.”

Wait. Lower the individual income tax rates! Most small businesses are proprietorships or S corporations that are taxed at individual income tax rates. I thought small businesses were the engine that drove new job creation. Besides, I remember the last time taxes were simplified. Reagan did it back in 1986. I had just started my business and was paying the light bill with borrowed money. I compared my income liability after the Tax Reform Act of 1986 with that of one of my wealthiest client’s. My taxes went up $600. His went down over $20,000. And only the tax rates were simplified in 1986. The new tax laws were even more difficult to understand. I read in the Wall Street Journal that year where a journalist quoted someone describing the Tax Reform Act of 1986 as Congress taking back the loopholes they had sold before so they could sell them again. Will this time be any different?

President Obama did say something where my cynicism failed to raise its ugly head. He said “We are the first nation to be founded for the sake of an idea – the idea that each of us deserves the chance to shape our own destiny,” and “The idea of America endures. Our destiny remains our choice.”

Small business people demonstrate this American concept and value every day. Though hard work, sacrifice, and the hope of a better future they still strive to better themselves, their children, and America. Most small business owners do not feel entitled to anything they don’t work for. It is cause and effect. Work hard, take calculated risks, and reap the rewards. They do this in spite of their government, not because of their government. They always have and they always will.

I may sound like an anarchist, but I’m not. I believe government is necessary and tax revenues are required for a common defense, etc. But knowing that billions of dollars are taken from hard working people and wasted or spent to preserve a Congressman’s standing is distasteful. Any way you look at it, tax is a redistribution of your wealth. And it seems the harder you work the more of your wealth is taken from you and redistributed.

In spite of my cynicism, I hope and pray President Obama is successful in leading our Country back to prosperity and economic strength. Heck, I’m only one of three white men in Oklahoma, Tennessee, and Arkansas that openly admits that I voted for President Obama. So I hope he proves my cynicism in our government wrong.

On the surface, I agree with most of what he said. I’m just afraid I would be seen like the emperor without any clothes. I’m afraid if I believe he is sincere in what he says and defend his cause I will end up bare-assed naked in public resulting in extreme embarrassment.

The one thing I’m not is a cynic of the people of the United States of America and its Constitution and Bill of Rights. When I look as the rest of the world I am elated that I live in Fort Smith, Arkansas, United State of America. That’s where my true loyalty lies.

About Potts
David Potts is a certified public accountant also accredited in business valuation. Owner of Potts & Company, Certified Public Accountants for more than 25 years, his practice focuses on small and medium size businesses and their owners in the areas of taxation, accounting and bookkeeping, business valuation and business advisory services. He is a Fort Smith native and a graduate of the University of Arkansas. You can follow more of his thoughts at ThePottsReport.com. Although every effort is made to provide you accurate and timely tax information, it is general in nature and not specific to your facts and circumstances. Consult a qualified tax professional to discuss your particular case.

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