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Thursday, September 23, 2010

A tax loophole for us little guys ... or in government talk...

...GDP Stimulus Plan.

Economic activity is often avoided or simply not reported in order  to avoid taxation.  Much of this activity is related to small cash  transactions done by individuals doing sideline ventures to make extra  money.  Some examples might include buying and selling used items on  Craigslist, selling aluminum cans, sewing, selling breakfast tacos, making  crafts, or other entrepreneurial activities.

Many people purposely keep their activities small in order to avoid  headaches and the accounting necessary to determine their tax liability.   However, many of these activities could bloom into a small business under  the right conditions.  This GDP Stimulus Plan is designed to get budding  entrepreneurs one step closer to a full time business.  In addition, this  plan will increase reporting of economic activity and encourage citizens to  produce goods and services beyond the scope of their regular jobs.    Finally, this plan will generate income for the government if only a few successful businesses are launched.

The plan is simple; create a tax loophole for us little guys.  To  say it another way, create a hobby profit tax exemption.  The amount of the  exemption could be experimented with, but the higher the number, the more  likely this proposal would help launch new businesses.  The cost to the  government is minimal because most hobby income is un-reported or under-reported.   The benefit to the government is an instant boost to our national GDP numbers when this economic activity is reported.  Increases in tax revenues would come later as individuals grow their hobbies into businesses.

To further encourage citizens to run their hobbies as a business,  acurately reproting their costs and revenues, a tax incentive should be  added to reduce tax paid on the individuals ordinary income.  For example,  an individual, making $50,000 per year at a regular job and $5,000 per year  doing a "hobby" business, might be offered a $500 reduction of taxable  income on the $50,000 in exchange for accurately reporting the $5000  income.  This type of arrangement would have some cost, but it would encourage even more people to produce more and to report it.  Assuming that some of these individuals will successfully find a business niche, these costs to the government would be quickly offset as new businesses are  launched and grow.  Of course, some penalties are needed for anyone falsely reporting "hobby income" simply to get the tax break.

I propose setting the "hobby tax" exemption at $20,000 per year.   There should be no penalty to any individual for working to achieve, via entrepreneurial activities, and reporting that income.  In order to encourage full reporting, this income  should not count against unemployment benefits, welfare, medicaid,  disability, or any other government service.  This policy is an incredibly  powerful way to empower millions of individuals to develop new skills, take  charge of their life, and be successful.

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