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Joe the Plumber: Stopped by taxes?

"Joe wants to buy the business that he has been in for all of these years, worked 10, 12 hours a day. And he wanted to buy the business but he looked at your tax plan and he saw that he was going to pay much higher taxes.

"You were going to put him in a higher tax bracket which was going to increase his taxes, which was going to cause him not to be able to employ people, which Joe was trying to realize the American dream," Sen. John McCain during the last presidential debate.

As a former small business owner hearing Joe Wurzelbacher's story during the last presidential debate, I was immediately skeptical. The snippets about his business aspirations didn't add up, and when I dug into the story, it was clear none of the parties — including Joe — really understood the situation.

After I sat down that night to write Joe a letter, more details have come out. As I suspected, he makes a very modest income, and the business is much smaller than early media reports indicated. Joe also lacks the plumbing license that would be required for him to actually operate the company, and he's fallen behind on his property taxes.


Fundamental points still hold
The real Joe doesn't quite fit the symbolic image of a working man on the verge of prosperity. But the fundamental points in my message to him still hold:

Dear Joe the Plumber:

It seems like your heart is in the right place, and you've worked hard at an honorable job. Now you have some hope of buying the other half of your two-man shop. Ownership and its rewards are a big part of your personal American Dream.

Good for you.

Now, thanks to the latest presidential debate, you've become a temporary national figure. The exposure could be worth more than a full-page ad in the Yellow Pages and a top-level Google ad, so I guess you could say you have tax cutters to thank for boosting your company's growth.

Or at least you would have if you'd remembered to mention the name of the business during all the media attention.

If I were your boss, first thing in the morning, I'd change the company's name to Joe the Plumber, get a new phone listing and throw up a web page.

Or not.

The interest in your political thinking will be good for less than a week, but people will always have clogged drains and faulty water heaters. And the real issues you face as a future business owner aren't about national policy, including any plan to tax high earners.

In fact, I'm concerned that your thinking about owning a business may be clouded by all the political rhetoric. Here's what I, as a former small business owner, think you should be concerned about.

Know what you're buying. According to reports, you want to buy the two-man plumbing shop you work for and plan to pay for it over a number of years. What, exactly are you buying? A name and a phone number, two used trucks, tools and inventory, and maybe some relationships with customers or contractors that you've had a role in building. And the opportunity to pay for it over time, out of the cash flow from the business.

This may be a good plan, depending on how much you're paying for good will — which shouldn't be very much for this small business. Otherwise, this decision will cost you far more than any income tax plans being proposed.

Don't feel bad. Most Americans don't know what they've been buying.

Separate your American Dream from Small Business Reality. Sorry, but considering that your ambitions call for only one or two employees, the chances of you generating enough sales to pay off your purchase and still earn $250,000 a year are very remote. That makes me wonder whether you quite grasp the financial side of running a business.

Instead of worrying about paying higher taxes some day, look at the realities facing you now. That is, most small businesses fail or fail to grow, and almost all of them earn less than $250,000 in taxable income for their owners.

The reasons have nothing to do with their income taxes — unless they fail to pay them.

I applaud your hard work and desire to control your own destiny. That's where you should focus. If you do, you'll discover that paying a slightly higher marginal tax rate some day is probably the smallest problem you've had to overcome.

Decide how much you need and invest the rest. If you do surpass the $250,000 threshold, you'd only pay 3 percent more on the dollars you earn above that amount. If you pay yourself $300,000, that means $1,500 in additional taxes.

I'm guessing right now, if I offered you $50,000 but said you'd have to pay $1,500 more in taxes, you'd take it in a heartbeat. Well, that $50,000 is an even better deal when you're wealthier, because it wouldn't be subject to the FICA you pay on all your earnings today. And it would come on top of having your basic needs in life pretty well covered.

If you don't like that deal, you'd have another choice. You could put up those extra dollars into health care for your employees, send them to training, buy a new truck, beef up your advertising, get some help to do the paperwork or even hire another plumber who could produce more revenue.

And then write your income back down to $249,999.

Your business will grow and your life will probably get better because you can spend more time doing what you like — whether it's thawing pipes, selling, or just helping people in a jam.

The anti-tax zealots want you to believe the scary stories that your future business prospects will be hamstrung by taxes you haven't even started to pay, yet. That's not really how it works, and if you don't understand that, stop listening to the small government advocates and start talking to a real small-business advocate.

Oh, and get that plumbing license, too.

Good luck,
Charlie Quimby, a guy who reached the American Dream, taxes and all.

A former small-business owner, Charlie Quimby is a communication fellow for Growth & Justice. A nonpartisan advocate for fair taxation and smart public investment, Growth & Justice believes a sustainable economy provides the foundation for a just society.


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Comments (10)

GREAT article! Thank You!!! I hope you've got this in the hands of the media and cable networks! Better yet, get this in the hands of the Obama campaign. I wonder if Joe the Plumber even knows the definition of Socialism?????

Charlie,

At our temp site (www.americaretoday.com) you'll find a 35 year plan that's good for Joe the plumber, and all his main street friends.

From 1 small business owner to another
THANK YOU CHARLIE!!!!!!!!!

Gail Hooks

Great letter.

I believe your letter contains an error. Obama's tax plan will eliminate the ceiling on payroll taxes on income above $250K. This amounts to a 15.3% increase in the marginal tax rate for a self-employed individual.

Charlie
I have been in business myself for over 45 years; and the economic models you have described are both highly accurate, and compelling. To NET $250K a year, Joe would have to be buying a business that had revenues of at least $3 million -- and at current valuations of such a business (1X revenue conservatively) he would be paying at least $3 million for that business. Unless he had a ton of cash (in which case he sould not be bitching about taxes), his debt service alone would erode his bottom line signficantly. In short, as you point out -- none of this makes sense!

Joe the Plumber is either a:
* fraud
* setup
* ignorant of business economics
* misrepresents
* or, to be polite, just is not knowlegable enough to understand the issues involved.

Based on the way this campaign has been waged, I choose option(s) 1 and 2.

Charlie, you are jumping to conclusions. I have a services business which produced $800K in revenues last year, $330K of which was payable to me.

They've both been tested during this long campaign. Obama remains a calm thinker. McCain runs around hair on fire waving six shooters at anything that moves.

Cory Smith,

You have a point about the Social Security payroll tax, even though it isn't in his current tax plan. Obama has said it wouldn't take effect for another decade, and I wouldn't be surprised if he has to compromise on it in the meantime. Still, if enacted, that would be the biggest tax increase for over-$250K earners.

On the other hand, in reality, Joe the Plumber is far more likely to benefit from a healthier Social Security system -- as well as the potential Obama tax cuts -- than to ever even sniff $250,000 in annual income. (Unless he really capitalizes on his 15 minutes!) (Somewhat ironically, I've also read that the real-life Joe hates the Social Security system. Go figure.)

Also -- if you paid personal income taxes on $330,000 profit from a small business last year, I would suggest contacting the McCain campaign. Judging by their frequent invocations of Joe the Plumber, it sounds like they could use a better, non-hypothetical example of Obama's tax increases in action.

Thank you. Despite the fact that I have explained to numerous people the difference between the way individuals are taxed and businesses are taxed, most people have never run a business and think that income taxes can prevent a business from expanding or even surviving, and the right-wing radio jocks keep encouraging that belief.