OPINION: the Self-Employment Penalty is a Barrier to Economic Growth
I don’t suppose any American looks forward to April 15. This was especially true for me this year, because I knew my tax bill was going to be a bit stiffer than in years past. I wasn’t complaining though. I run my own law office, and the fact that I would have to pay more in taxes was a result of having done more business in 2012, and that’s always a cause for celebration.
Because I am self-employed, I am required by law to pay taxes on a quarterly basis in amounts designed to approximate that year’s expected tax liability, using the previous year’s earnings as a guide. Since I had earned significantly more in 2012 than in 2011, I knew my withholdings would not cover the entirety of my tax liability, such that when my accountant called on the morning April 15th, I was fully prepared for him to tell me that I owed extra money.
But I wasn’t prepared for the amount.
It seems that in my mental calculations I had forgotten to factor in the bane of all small business owners, the dreaded “self-employment penalty,” which more than doubled my tax bill. It’s actually called the “self-employment tax,” but it’s a penalty. One of the most basic principles in economics is that you get more of what you subsidize, and less of what you tax. Ergo, because a tax serves to discourage the activity to which it applied, in plain English that means it’s a penalty.
And the message this penalty sends is clear enough: the government would rather have me looking for a job instead of creating one for myself and others.