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).
According to the Census Bureau, these small businesses (in this case, defined as employing less than 100 people) give a paycheck to 42 million Americans. In 2006, the IRS reported that net small business profits exceeded $700 billion. How many trillions of dollars in goods and services did small businesses purchase? Trillions of dollars, to be sure.
The point is that Joe the Plumber and others like him are the beating heart of the U.S. economy. If you tell these entrepreneurs that the government is going to take 50 percent of everything they make after a certain amount of income, they’re going to stop working. Joe the Plumber might not make as many house calls. He might not bother hiring that extra assistant plumber. Why should he? He can stay home, watch the Ohio State Buckeyes on TV, and not have to give half his enjoyment to anyone, least of all the government.
Multiply that across the entire economy. From Joe the Plumber’s Ohio, to Barack Obama’s Illinois, to Nancy Pelosi’s California, a great iron curtain of lost productivity will descend over America’s small business sector. Your Mom and Pop store up the block might not be open on Saturdays anymore. People will make a rational decision that it doesn’t make sense to work that extra hour or invest in that extra piece of equipment if it means that the government will be keeping half of my profit.
As the great engine of U.S. small business productivity grinds to a halt, America will slowly but surely turn into Western Europe without the charm. “Cowboy capitalism” will be replaced with a nationwide imitation of modern-day Detroit.
That’s what the Obama tax hike is all about. You can’t tax the Monopoly man without screwing Joe the Plumber and flushing the U.S. economy down the toilet.