In the summer of 2003, my father, Rick Tollefson, 51, started an online business selling softball pants from our garage in Lisbon, Ill., a small farm town about 50 miles southwest of Chicago.
The small retail business was launched in an uncertain economic environment only a few years before a looming recession and almost a decade before Congress passed the Small Business Jobs and Credit Act of 2010. Small Business Administration assistance was not available to alleviate the loan process and no federal, state, or local government official or agency showed up to provide more cost effective options for financing a start-up company. Its capital was entirely my father’s assets.
Still, even with the odds stacked against him, my father transformed Boombah, Inc., into a successful, growing enterprise with more than one hundred employees and access to an increasing number of sport and fitness markets. He purchased a new warehouse in Yorkville, Ill., a town hit hard by an economic recession, and he provided jobs in a state with an unemployment rate of 9.8 percent in December 2011.
“One of my biggest concerns going forward,” my father said, “is government tax policy and the disproportionate burden entrepreneurs have to bear. I voted for Barack Obama in 2008, out of frustration with the Republican Party, but I can’t vote for him in 2012, for someone who isn’t going to do anything about my taxes. I can’t put my money overseas like Jeffrey Immelt and GE can — there are no tax loopholes for Boombah.”
The tax and regulatory environment for American businesses comparable in size to Boombah, Inc., is frustrating at best and debilitating at worst, he said.
The U.S. corporate tax rate currently stands at 35 percent and, according to the Tax Foundation, “the average combined federal and state corporate tax rate in the U.S. is 39.3 percent, second among OECD (Organization of Economic Cooperation and Development) countries to Japan’s combined rate of 39.5 percent.” Boombah and other businesses in Illinois are also up against a 9.5 percent state corporate tax.
As a result, about 4.5 million U.S. businesses, including Boombah, elect to remain S Corporations. Entrepreneurs in this corporate category pay an income tax rate on the capital in their enterprises. The top rate in the United States is 35 percent.
“I am not a C Corporation,” my father said, “because as an S Corporation I am only taxed once, albeit at 35 percent. Were I to become a C Corporation, Boombah would be taxed annually at 35 percent and I would be taxed again at an income rate when I take out my salary from my own business. I have no incentive to become a C Corporation because corporate rates in the U.S. and Illinois are so high.”
What does Tollefson want from the government?
“I am growing a business with two hands tied behind my back,” he admitted. “I’m not asking for state incentives. I just want the government to stop making this so hard.”
In the past few months, the Obama administration has launched an assault on those high earners in the United States who are not paying their fair share in taxes, highlighting investors such as Warren Buffett who pay a capital gains tax rate and proposing what is essentially an alternative minimum tax to level the economic playing field. While Buffett and other investors are paying around 15 percent annually, entrepreneurs like my father struggling to grow flow-through businesses in Illinois are paying an effective rate quickly approaching 50 percent, factoring in both the federal and state income tax rates, workers’ compensation, employee health insurance, and matching Social Security payroll taxes.
“The president yells about the rich,” my father said, “but what he does not understand or talk about are the entrepreneurs shouldering the tax burden while Warren Buffett, Mitt Romney, John Kerry and others pay very low taxes on their investments or inheritances. Believe me. I’m paying my fair share.”
My father said he finds it counterintuitive that President Obama has encouraged Congress to pass the Buffett Rule, allow the Bush tax cuts to expire, and consider other methods of economic “fairness” under the guise of job creation. If the Bush tax cuts expire, higher income rates will affect S Corporations without changing the rates Buffett, Romney, and Kerry are subject to under the U.S. tax code.
“It doesn’t make sense,” my father said. “If you gave me Warren Buffett’s tax rate today, I would go out and hire 30 people tomorrow.”
If the American tax burden is as disproportionate as my father feels it is, the U.S. Government is effectively skipping over heirs, investors, and large corporations to tax the small and midsize American companies that created well over 100,000 jobs in the last months of 2011.
Going forward, my father admitted that doing business in Illinois will be a challenge, but the president of Boombah is also a native of Yorkville, a married father of six living in Lisbon, and the varsity boys’ basketball coach at Newark High School, a team that won the school’s first IHSA Class A state championship in 2011. He has a heart for the small, north central farming region of Illinois and his objective is to continue investing in his community, which begs the question, why won’t the government “stop making this so hard?”