A new star emerged from Wednesday night’s final presidential debate: Joe the Plumber. Joe is an actual person, one Joe Wurzelbacher of Holland, Ohio. His exchange with Barack Obama on tax policy was recorded at Sen. Obama’s recent appearance in Toledo.
During the debate, John McCain tried to use “Joe the Plumber” as an example of someone who would be gored by an Obama administration’s tax policy. Whether that is true or not has a lot to do with how lucrative Joe the Plumber’s business will be. On the rope line in Toledo, Mr. Wurzelbacher told Sen. Obama he hopes to purchase the business in which he is now employed.
Under the Obama tax plan, those earning $250,000 or more would pay a higher income tax rate – 39 percent, up from the current 35 percent. President Bush, supported by a Republican Congress, rolled back the tax rate from 39.6 percent to 35 percent in his first term.
If Joe the Plumber works for a large plumbing outfit and he nets $300,000 a year, under Sen. Obama’s tax plan, he would pay a higher rate on the $50,000 in income above the $250,000 threshold.
If Joe realizes his dream and purchases the business, he has two tax strategies from which to choose, according to Frank Lehman of Peregrine Tax Services in Belfast. Joe can file his income tax as a sole proprietor in the first strategy. Under the current tax code, if the business had net earnings of $100,000, he will pay a $15,000 self-employment tax and pay an income tax rate of 15 percent or 21 percent, depending on other factors.
The second tax strategy, Mr. Lehman explains, would have Joe incorporating his business. If the business is expected to net $100,000, Joe could pay himself an annual salary of $50,000 and divert the remaining $50,000 to stockholders, such as himself and his wife. Joe would pay income tax on his salary and another tax on the dividend.
Neither Sen. Obama nor Sen. McCain proposes to change this part of the tax code.
More to the point, Mr. Lehman argues, is that few small businesses – at least in Maine – net more than $250,000 annually.
One could argue that returning to a 39 percent income tax rate – just a 3 percent increase – would mean the difference between a business creating a new job or not. But perhaps more critical to Joe’s business is a revamped health insurance system. If Joe is netting $250,000 or more annually, his plumbers may expect him to provide health insurance. That benefit would cost Joe more than the 3 percent tax increase.
In his exchange with Mr. Wurzelbacher, Sen. Obama said he wanted to “spread the wealth around.” A better phrase would have been “spread the burden around.” The cost of services provided by government never diminishes. The debate is over who pays what.