THE EMPLOYEE MEETING

I recently received this excellent example of Economics 101 in an email from Roger J. Sustar, the president and owner of Fredon Corporation (Mentor, OH), a contract manufacturer that machines complex parts at high tolerances for aerospace, aircraft, defense, medical, and off-highway equipment applications. It was originally sent to him by David Verbic of Accurate Metal Sawing Service in Mentor. Kudos and thanks to Roger and Dave. Let the class begin:

“I would like to start by thanking you for attending this meeting, though it’s not like you had much of a choice. After all, attendance was mandatory. I’m also glad many of you accepted my invitation to your family members to be here as well. I have a few remarks to make to all of you and then we’ll retire to the ballroom for a great lunch and some employee awards.

“I felt this meeting was important enough to close all 12 of our tire and automotive shops today so that you could be here. To reassure you, everybody is being paid for the day ? except me. Since our stores are closed we’re making no money. That economic loss is mine to sustain. Carrington Automotive has 157 full time employees and around 30 additional part-timers. All of you are here. I thank you for that.

“When you walked into this auditorium you were handed a rather thick 78-page document. Many of you have already taken a peek. You were probably surprised to see that it’s my personal tax return for 2008. Those of you who are adept at reading these tax returns will see that last year my taxable income was $534,000. I’m sure this seems rather high to many of you. So . . . let’s talk about this tax return.

“Carrington Automotive Enterprises is what we call a Subchapter S corporation. In our tax code, Sub-S status means that the income from all 12 of our stores is reported on my personal tax return. Businesses that report their income on the owner’s personal tax return are referred to as small businesses. So you now see that this $534,000 is really the total taxable income off the combined profit from all 12 of our stores. That?s an average of just over $44,000 per store.

“Why is it important for you to see my 2008 tax return? Well, there’s a lot of rhetoric being thrown around today about taxes, small businesses and rich people. To the people in charge in Washington right now I’m a wealthy American making over a half-million dollars a year. Most Americans would agree I’m just another rich guy. In this room, though, we know the reality: I’m a small business owner who runs 12 retail establishments and employs 187 people. Now here’s something that shouldn’t surprise you, but it will: 99.7 percent of all employers in this country are small businesses, just like ours.

“Every one of these businesses reports their income on a personal income tax return. You need to understand that small businesses like ours are responsible for about 80 percent of all the private sector jobs in this country, and about 70 percent of all jobs created over the past year. You also need to know that when you hear some politician talking about rich people who earn over $200,000 or $500,000 a year, they’re talking about the people who create the jobs.

“The people running the show in Washington have talked for months about raising taxes on wealthy Americans. I already know that in two years my federal income taxes are going increase by about 4.5 percent when the Bush tax cuts expire. When my taxes climb by 4.5 percent, the Democrats will be on television saying this isn’t really a tax increase. They’ll explain that the Bush tax cuts have expired. Nothing more. Here at Carrington we’ll know that almost 5 percent has been taken right off of our bottom line. And that means it will be coming off your bottom line.

“Numbers are boring, I know, but let’s talk a bit more about that $534,000. That’s the money left last year from company revenues after I paid all of the salaries and expenses of running this business. Now I could have kept every penny of that for myself, but that would have left us with nothing to grow our business, to attract new customers and to hire new employees. You’re aware we’ve been talking about opening new stores in Virginia Beach and Newport News. To do that I must buy or lease property, construct a building and purchase inventory. I must also hire additional people to work in those stores.

“These people won?t immediately be earning their pay, so where do you think the money for all of this comes from? Right out of our profits ? that $534,000. I need to advertise to bring customers in, especially in these tough times. Where do you think that money comes from? Oh sure, I can count it as an expense when I file my next income tax return, but for right now that comes from either current revenues or last year’s profits. Revenues right now aren’t all that hot . . . so do the math. An effective advertising campaign might cost us more than $300,000.

“Is this all starting to come together for you now?

“Right now the nationalized health care plan being pushed will add anywhere from another two to 4.6 percent to my taxes. If I add a few more stores, which I would like to do, and if the economy improves, my taxable income ? our business income ? could go over one million dollars! If that happens, the Democrats have another 5+ percent tax waiting! I’ve lost track of all of the new government programs that supposedly will be financed with new taxes on people called “wealthy Americans.”

“And while we’re talking about health care, let me explain something else. I understand that possibly your biggest complaint with our company is that we don’t provide you with health insurance. That is because, as your employer, I believe is my responsibility to provide you with a safe workplace and a fair wage and to do all that I can to preserve and grow this company that provides us all with income. I have no more a responsibility to provide you with health insurance than I do with life, auto or homeowner’s insurance, though I periodically invite agents from health insurance companies here to provide you with information on private health insurance plans.

“The Democrats want to levy yet another tax against Carrington in the amount of 8 percent of my payroll as a penalty for not providing you with health insurance. You should know that, if they do this, I will reduce every person’s salary or hourly wage by that same 8 percent. This will not be done to put any more money into my pocket, but to make sure that I don’t suffer financially from government efforts to control our healthcare. It is your health, not mine. It is your healthcare, not mine. These are your expenses, not mine. If you think I’m wrong about all this, I would love to hear your reasoning.

“Try to understand what I’m telling you here. Those people the goverment calls “wealthy Americans” are, in very large part, small business owners. You have the evidence that I’m one of them, and surely the owner of a bunch of tire stores is nothing special. That $534,000 figure on my income tax return puts me squarely in Democratic crosshairs when it comes to tax increases.

“Let’s be crystal clear about this: Any federal tax increase on me will cost you money, not me. Any new taxes on our company will be new taxes that you, or the people I don’t hire to staff the new stores I won’t be building, will pay. Do you understand? You’ve heard about things rolling downhill? Taxes, like that other stuff, roll downhill. Now you and I may understand that you are not among those that the Democrats call “wealthy Americans,” but when this “tax the rich” deal comes down, you are going to be standing at the bottom of the mud slide. That’s life, my friends . . . elections have consequences.

“Our economy is very weak right now. I’ve pledged to get us through this without layoffs or cuts in your wages and benefits. Too bad the politicians can’t get us through this without attacking our profits. To insure our survival, I must set aside a substantial portion of that $534,000 for unexpected expenses and a worsening economy. Trouble is, the government is eyeing that money too . . . and they have the guns to take it.

“I don’t want to make this too long. A great lunch waits for us. But you must understand what’s happening here. I’ve worked hard for 23 years to create this business. Many years I couldn’t take a penny in income because every dollar was dedicated to expanding the business. During tough times, it took every dollar of revenues to replenish our inventory and cover your paychecks. During those times I earned nothing. Let me know if you want to see those tax returns.

“Most Americans don’t realize that when government talks about raising taxes on people making more than $250,000 a year, they plan to raise taxes on small businesses. The U.S. Treasury Department says six out of every ten individuals in this country with incomes of more than $280,000 are actually small business owners. About one-half of the income in this country that is subject to these increased taxes comes from small businesses. Depending on how many of these new taxes are passed, our company could see its tax burden increase by as much as $60,000 or more.

“Bottom line? I’m not taking this hit alone. As soon as these tax increases are on the books, I’ll take steps to make sure my family isn’t affected. When you own the business, you’re allowed to do this. I built this business and I’m not going to see my family suffer because we have a government that thinks wealth should be distributed rather than earned. Any additional taxes, of whatever description, that the government inflicts on this business will come straight out of any funds set aside for expansion or pay and benefit increases. Any plans I to hire additional employees for new stores will be put aside. Any plans for raises for the people now working for me will be shelved. Year-end bonuses might well be eliminated. Sounds rough, but that’s reality.

“You will continue to hear a lot of anti-wealth rhetoric from the media and from the left. Choose to believe what you wish. But when it comes to Carrington Automotive, you know the truth. Our books are open to you any time. One of the lessons to be learned here is that all taxes and regulatory costs placed on businesses will eventually be passed on down to individuals such as yourself. This is not about admonishing anyone. It is not about issuing threats. This is part of the education you should have received in the government schools, but didn’t.

“Class is now dismissed.”

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Mike Riley is the editor of Fabricating & Metalworking magazine and the author of Backfield in Motion (Derek Press, 2007). Share your views with him on this class meeting and other impacts of the economy at 205-681-3393 or mike.riley@cygnusb2b.com.