Business 101 For Joe The Plumber
I decided to write today about a subject that I’m sure no one else is writing about: Joe the plumber. For anyone who spent the last 24 hours in a cave, here’s the video of Joe Wurzelbacher asking Obama about taxes and small businesses:
Judging from the articles I saw online this morning, there seems to be immense confusion regarding revenue, profit, business expenses, and cost to buy a business. Obama’s plan would increase business taxes by 3% (from 36% to 39%) on marginal profits over $250,000. That means that only the profit over $250,000 would be taxed at the higher rate. The revenue (total number of dollars generated) a business brings in has nothing to do with it, since most businesses shell out a considerable amount of their revenue in expenses. And salaries are included in expenses. So for a business to profit more than $250,000/year - after paying all expenses and salaries -it has to be taking in a huge sum of money in revenue. Now that we have that cleared up, let’s look at the numbers. Since I’m a health insurance agent, I’ll be focusing not only on the basic tax proposals, but also on the tax mechanisms that the candidates have proposed regarding small businesses and health insurance.
Wurzelbacher mentioned the business he’s looking at buying, Newell Plumbing and Heating, “that makes about 250, 270, 280 thousand dollars a year” and consists of himself and the owner of the company, Al Newell, as the only two employees. I’m going to assume that the dollar figure he’s talking about is profit, after all company expenses (including salaries for himself and the owner) are paid, otherwise this whole discussion is a waste of time. And to give him the benefit of the doubt, I’m going to go with his upper estimate, and say that the business has a profit of $280,000/year. Since my focus is health insurance, I’m also going to assume that the business provides health insurance for Wurzelbacher and Newell and their families (which is likely, considering there are only two employees and the business appears to be thriving, to put it mildly). The Kaiser Family Foundation currently pegs average family health insurance premiums at $12,680/year.
So let’s look at how this business would fare under the various tax and health insurance platforms of the two presidential candidates. With McCain’s plan, there would be no increase in tax rate on the profit the business makes. But health insurance premiums, which are currently a tax-deductible business expense, would no longer be tax-deductible. So if the business is paying premiums for two families, at roughly $12,680 each, that’s $25,360/year that the business is spending on health insurance premiums and deducting as a business expense. So that money is currently not included in the $280,000 profit the business makes. Losing that tax deduction would mean that the business would be paying 36% tax on the $25,360 that they currently pay for health insurance premiums. That’s $9,129/year in additional taxes. Now the business has two options - they can either continue to pay for health insurance for the employees and their families, or they can stop offering coverage and Newell and Wurzelbacher would have to go out on their own into the individual health insurance market and find their own policies. Either way, that $25,360 that the business was spending on health insurance premiums is going to be taxable under McCain’s plan, since it would no longer qualify as a tax-deductible business expense. Both employees would be eligible for the $5,000 tax credit McCain is proposing to help offset the cost of individual health insurance premiums. But it’s likely that they would have to raise their deductibles and out of pocket exposure in order to get policies for $5,000/year, and if they or any of their family members have any pre-existing conditions, they will face difficulties in obtaining individual health insurance.
Whether people want to take the McCain health insurance tax credit and go out on their own and find individual health insurance probably depends a lot on how healthy they are, how old they are, and how much risk they’re willing to take. As I’ve mentioned, the McCain tax credit for health insurance would be great for my family. But for a lot of people - with pre-existing conditions, with large families, or without the means to save money to cover a higher deductible - the McCain health insurance reform would leave them with less access to affordable health care than they have now. And in order for a health insurance reform measure to work, it has to work for everyone, not just those who design it.
Now let’s consider Obama’s plan. True, he would raise taxes on small business profits (not revenue) that are over $250,000 (a threshold that the vast majority of small businesses don’t even come close to reaching). In this case, that would be $30,000/year in profits being taxed at the higher rate. The tax rate on that $30,000 would go from 36% to 39%. The difference would be an additional $900/year in taxes for the business. The business would still get a tax deduction for the health insurance premiums they pay, so it would continue to make good business sense to offer group health insurance for the employees.
So Obama would increase taxes on the plumbing business by $900/year (if the business is making an annual profit of $280,000). McCain would let the business keep that $900/year, but he would take away more than $9,000 in tax savings that the business gets by deducting health insurance premiums.
All of these numbers are chump change compared to the revenue the business would be pulling in to be showing a profit of $280,000/year. A webpage showing information for Newell Plumbing and Heating shows that they aren’t incorporated and annual sales are actually $100,000. So they currently have nowhere near the kind of profits that Joe is worried about making. But if they had the business sense to incorporate, their business could get VERY wealthy and hire a LOT of employees with health insurance benefits before they needed to worry about the business showing a profit of more than $250,000 annually.
This is what Obama gets for going around talking to “average Joe’s” like this. The McCain campaign has made sure he only talks with people who agree with him and ask him questions like “when are you going to take the gloves off” and “I don’t trust Obama, he’s an arab”
If Joe’s business has a $100,000 profit annually, the McCain plan would give the business a 1.4% decrease and the Obama plan would decrease his taxes by 1.8%.
I always thoroughly enjoy reading your posts. Your discussions of our health care system and the various issues in the industry are refreshing and actually enjoyable to read. Most of the healthcare blogs out there are quite dull! Great post - all we’ve been hearing about is “Joe” and who can do what for him better… but nobody has really given us the facts or the details. And unfortunately, most people don’t take the time to sit down and figure out the facts for themselves.
This looked like it had a chance to be a discussion about serious issues if he was a sincere “average joe”. But the guy was BSing with Obama in the youtube video and you can tell by the way he is talking. Now he is apparently spouting off on the news about how he hates to be paying taxes for social security, and he hates hearing people not support our country and the war in Iraq.
Come to find out he has a lein on his house for not paying his taxes. Come on Joe! Freedom isn’t free buddy. There is all something the govt does that we are pissed our taxes are paying for, but you can’t just not pay.
Louise/Jay - great post. couple other observations. Joe looks to be fit, he’s young, and single. He would likely qualify under the McCain plan for a decent plan at a low price. but, and it’s a big but, if he has any pre-ex or other medical issues, he’s not going to be able to find coverage. And, under the McCain proposal, there’s very little to prevent an insurer from canceling coverage if Joe gets sick.
I wonder if Joe has coverage now, or if he’s relying on the rest of us to pay for his health care? Now THAT sounds like socialism!
Forget the character attacks, however deserved or not. Let’s deal with the actual issue that was raised. Here’s a relevant excerpt from the conservative Wall Street Journal’s article of OCTOBER 17, 2008, ‘As Joe the Plumber Grows Famous, the Politics Get Murkier’:
“To reach a level that would be affected by Sen. Obama’s proposed tax increase, Mr. Smither said, a mom-and-pop plumbing company like Newell would have to clear $5 million in annual sales. [Joe’s company actually reports only $100,000 in sales.]
Even if Mr. Wurzelbacher reaped taxable income from his business of $280,000 a
year, he’d pay only about $900 more a year in taxes under Sen. Obama’s plan, which
would raise the tax rate on the income between $250,000 and $280,000 to 36%
from 33%.
[...]
If Mr. Wurzelbacher earns the wages of a typical Ohio plumber, $40,600, and holds a $90,000 mortgage, he would see a TAX CUT (emphasis added) under Sen. Obama’s plan of more than $1,000, compared with no tax reduction under Sen. McCain’s.
If he succeeds in buying the plumbing business where he works, he could see even more tax benefits, including Sen. Obama’s proposed elimination of capital-gains taxes for small-business investment, a 50% tax credit to purchase health insurance for employees and a $3,000 tax credit for every new hire over the next two years.”
Other issues and ‘things we wish were true’ aside, better to acknowledge facts and deal with them objectively, at least from our end. And let’s not be distracted by whether Joe ‘padded his resume’ in order to get the answer to a question in which he was interested … what matters in the TOPIC, not whether Joe isn’t entirely on the up-and-up.
I do not believe that your math is correct concerning the change in the non-tax deductibility of health insurance benefits. Currently, no taxes are paid on health insurance. If health insurance businesses were taxed, INDIVIDUALS would pay the tax. For businesses, health insurance still counts as a labor costs and would reduce their net profit and thus tax liability. If individuals would receive a $12,000 health insurance package from work, currently they do not owe any taxes on this benefit. If individuals were taxed on this benefit, then an individual in a 25% tax bracket would owe $3000 in additional taxes. If you are in the 40% tax bracket, you will owe $4800. This means on net, the McCain plan would decrease your taxes by $2000 for the 25% tax bracket and $200 in the 40% tax bracket.
Also, even if the employer paid for health insurance for a group, each individual would be taxed according to the average cost of the health insurance plan per worker (likely weighted by whether it was a family or single plan).
Jason,
First let me say that I defer to your knowledge of economics, which is far beyond mine. And thanks for reading my article and taking the time to comment. I was trying to limit my article to just the effects of the Obama and McCain plans on small business owners, since that was the position Joe the plumber was taking in his questioning. I didn’t get into the effects on individual citizens or employees - only on those who own businesses that profit in excess of $250,000/year.
But I am curious about your statement that “For businesses, health insurance still counts as a labor costs and would reduce their net profit and thus tax liability.” If health insurance premiums would no longer be tax deductible for businesses under McCain’s proposal, how is this possible? A business can spend whatever it likes, but when it comes to paying taxes and calculating profits, only bona fide tax deductible expenses can be subtracted from net income. For example, a business owner can spend $20,000 on Armani suits to wear to the office, but this isn’t an allowable tax deduction. So even though it may be money that the business spends, it can’t be deducted for income tax purposes. My interpretation of the McCain proposal is that health insurance premiums would no longer be a deductible expense for business owners. Can you expand on this for me?