The latest American to get his fifteen minutes of fame this week is Joe Wurzelbacher, better and more famously known as “Joe the Plumber.” Joe challenged Senator Barack Obama (D-Ill.) recently on the campaign trail over the senator’s plan to raise taxes on small businesses making more than $250,000. Joe wants to purchase a plumbing company that today nets $280,000 per year, and he wanted to know why the possible next President of the United States wanted to raise his taxes.
It’s a good question. So, we at Americans for Tax Reform ran the numbers. According to our calculations (and there are always assumptions involved when you’re translating campaign rhetoric into 1040 reality), Joe the Plummer will face a net tax hike of about $4,000 per year. This is $4,000 that Joe won’t have to hire an apprentice, purchase new plumbing equipment, or save for his retirement.
How do his taxes get hiked? First and most significantly, Obama has said repeatedly that he will strip away the Bush tax cuts from any household making more than $250,000 per year.
Secondly, Obama has said he would raise the self-employment tax (which pays for Social Security and Medicare) for those making more than $250,000. Because he has been very non-committal on details, ATR assumes that the full 15.3 percent self-employment tax rate will apply to Joe’s marginal income.
The results are staggering for Joe: his overall tax bill goes up by about $4,000 per year. But Joe’s not alone. According to the IRS, there are about 28 million small business owners in the United States. Nearly 3 million of them earn at least $200,000 per year. These are the businesses that Obama is targeting with his tax hike.
But wait, you might be saying. That’s a pretty small percentage of all small business owners (and the Obama campaign would remind you of that same point). What that simplistic treatment leaves out, though, is that fully two-thirds of all small business profits are earned by these three million small business owners. So when Obama raises their top marginal tax rate to (perhaps) over 50 percent, he’s raising the tax rate on two-thirds of small business profits earned in the United States to Jimmy Carter levels.
Small businesses by and large pay their income taxes on their owners’ tax returns. These 28 million owners control all the sole proprietorships, partnerships, and S-corporations in the country. It’s literally impossible to raise taxes on “the rich” without raising taxes on small business income. The worst case scenario is a top small business tax rate of 54.9 percent (the result of combining a full 15.3 percent self-employment tax with a top marginal income tax rate of 39.6 percent).