What Would Joe Do?
Joe the Plumber, meet Joe the Builder. And Joe the IT Consultant. And Joe the Trailer Hitch Maker.
They're just a few of the countless small-business owners who watched last night's presidential debate, which introduced America to Joe Wurzelbacher, an Ohio plumber who had confronted Sen. Barack Obama over his proposed tax plan at a rally earlier in the week. According to Wurzelbacher, whose story dominated the debate, the Democratic nominee's plan to raise the tax rate on people earning more than $250,000 a year would hinder his "American dream."
Republican John McCain seized on the story as an example of what small-business owners really think about Obama's tax strategies.
"What you want to do to Joe the plumber and millions more like him is have their taxes increased and not be able to realize the American dream of owning their own business," McCain said to Obama during the debate, while vowing that his plan would keep taxes low for small-business owners.
According to Obama, 97 percent wouldn't be touched. Indeed, statistically speaking, most small businesses make less than $250,000 in net income after expenses, according to Small Business Administration's Office of Advocacy and the Tax Policy Center. What's unclear is how many of these are home-based businesses without employees, and how many are employer firms that create most of the new jobs the candidates tout on the campaign trail. How would they be impacted by Obama's tax plan? Like Wurzelbacher, would higher taxes derail their entrepreneurial plans?
We put those questions to business owners from a range of industries, from a trailer hitch maker to a long-distance phone company. They all have one thing in common, though. They all happened to be named Joe.
What do you think of Sen. Obama's plan to raise rates on small businesses with taxable income higher than $250,000 a year?
Joe McMahon, co-owner and president of Audubon Machinery, a North Tonawanda, N.Y.-based laboratory equipment maker: I think John McCain should have asked Obama if he knows what a K-1 form is and how it's used. My bet is that all he would have gotten back was a dumb look. Most of the small businesses I know of are setup as Subchapter S corporations, so the profit of the business flows through the tax return of the owner as "Income." I own and run a small business. We have about 45 people employed and a top line of about $8,000,000 in sales. I pay myself a salary of $130,000 and at the end of the year, my partners and I will divide and claim the profit from our business as income. We will only actually take enough out in the form of a distribution to cover the taxes and keep the rest in the business to continue to fund our growth. A bigger slice for taxes means less fuel for growth, fewer new jobs created, etc.
Joe Works, co-founder of Humboldt, Kan.-based B&W Trailer Hitches: I am generally opposed to raising taxes at any time for any reason beyond the very high current levels. Our government should become less intrusive into our lives, and should be less wasteful and inefficient. As a small-business owner earning more than $250,000 per year, I feel like taxes today are already stifling to small-business growth and future health. Small businesses are the backbone of this economy, and I do not think it is right for the government to decide that its role will be to redistribute my earning to whomever they decide.
Joe Oster, president of Structured Technologies, a Rochester, N.Y.-based IT services firm: It sucks. Totally.
Joe Zarrett, president and founding partner of Verndale, a Boston-based Web consulting firm: I'd begrudgingly accept the additional tax burden on the condition that it is bound to the health tax credit, zero capital gains, and expanded loan programs that represent the cumulative Obama/Biden agenda for small business. If I were evaluating the tax increase on its own merit, I'd have the same reservations as our new friend 'Joe the Plumber' in Ohio. However, if you examine Obama's entire plan for small business, it could be argued that our additional tax burden may likely be offset by reduced health-care costs and an increase in revenue brought about by additional capital availability and growth amongst the small businesses and venture backed start ups that are our customers.
Joe Mattausch, founder and president of TC3 Telecom, an Adrian, Mich.-based long-distance phone company: I think Sen. Obama is trying to leverage the perception that $250,000 represents the concept of "wealthy." People who have owned even a small company will realize how easy it can be to achieve this income, and yet still live a mediocre life style. Sen. Obama, like most Democrats, seems to consistently fail to recognize that what is necessary is less spending, and not more taxes.
Joe Albanese, founder and CEO of Commodore Builders, a Newton, Mass.-based general contractor: While many, many sole proprietorships will be below the $250,000 per year threshold, I personally believe that the small businesses that are the backbone and fuel of our economy have a dedicated employee base, whether it is 10 employees or 200 employees. A significant number of these businesses make significantly more than $250,000 per year. The profits of these businesses are an essential reinvestment to capitalize the business and fuel its development and long term stability. These businesses will be taxed more, and the employees will be hurt. Salaries and bonuses will be impacted by this plan.
How would the plan impact your business?
Joe McMahon: It would certainly restrict the rate at which we could grow.
Joe Works: My business is currently strained by the tax code and the heavy burdens of government regulation, unfair workers compensation insurance laws, high health-care insurance costs, and the U.S. economic conditions and trade imbalances. To talk about increasing that load is very scary for the future of business in this country. My largest cash-flow concern each year is how to have the cash available to pay the federal income taxes, and still have anything left to grow the business, increase wages, or hire additional employees. Growing businesses need profits for capital improvements, research and development, promotion, and advertising, etc. If Mr. Obama takes more profit away, less business growth and hiring will be the result.
Joe Oster: We would, of course, have to pass the burden along to our customers, raising our prices, making successful firms less competitive. It defies logic.
Joe Zarrett: I think the cumulative plan could end up benefiting our company in the long run. Health care is a runaway cost for us and each year we seem to be paying more and covering less. Also, the benefits of zero capital gains could reignite the VC market which we'd indirectly benefit from. Again, I believe the only way we have a chance of deriving a net benefit is if these programs are intrinsically attached to any additional tax liability.
Joe Mattausch: This plan will result in a net increase in my personal taxes as a result of any future growth in my business.
Joe Albanese: In order for my business to grow and stay viable, I have to build my retained earning. My bank and bonding companies -- 2 essential life-lines to my business -- drive this requirement. We are in a highly competitive marketplace through a challenging business cycle. Higher taxes will impact our ability to remunerate our people and capitalize our business.
How big a role do taxes play in your financial planning?
Joe McMahon: As our business hopefully continues to grow, planning for taxes will play a more important factor that it has until now.
Joe Works: A great deal of my time and mental energy is consumed by struggling to hang onto as much of my profits as possible, and keeping the hungry tax code away. I have changed business structure from a C corporation to a Subchapter S corporation, and now am entering into an ESOP (employee stock ownership plan) primarily to legally avoid taxation as allowed by the tax law. It is a huge waste of the business owners' time and talents, but necessary if growth of the business is the goal.
Joe Oster: As a closely held S corp, they play a huge role. Our cash flow and ability to secure capital funding for expansion, and even day-to-day operations, is entirely dependent on our ability to retain profits.
Joe Zarrett: Obviously, we factor our tax burden into our growth and financial planning. However, I can't think of a time in our 10 years in business that we have altered strategies based exclusively on the tax implication.
Joe Mattausch: Tax planning is a major concern. I spent several thousand dollars this year to implement strategies to reduce my tax burden.
Joe Albanese: Taxes play a huge role in our financial planning; they comprise a significant line item in our income statement.
Do you think wealthier businesses should pay more taxes?
Joe McMahon: I think there should be some form of AMT for profitable, publicly traded corporations. Hearing that some global multinational companies pay less than we do makes me sick.
Joe Works: What sense does it make to punish the successful? Do we really believe it is right for nearly one half of the population to pay no taxes at all, and that some of those actually receive money back from the IRS? A small-business owner earning $250,000 per year will today be paying $100,000 in taxes, perhaps spending $75,000 for themselves and their family living expenses, which leaves only $75,000 to re-invest into the business. If the business is growing, that $75,000 has to go for increases in inventory costs, additional accounts recievables, equipment, and new employee training. Businesses making more money DO pay more taxes. No, the rate of taxes should not increase, at least for businesses earning less than $100 million per year. Above that amount, I have no experience or expertise, but it still does not make economic sense to me to curtail the successful activity of a company that is hiring the workers and generating economic activity that this country needs so desperately.
Joe Oster: Absolutely not. It is the death of capitalism as we know it. This doesn't spur small-business formation and success, it solely penalizes competence. Having been in business for 20 years, I've seen 'em all come and go. The swing vote ain't taxes.
Joe Zarrett: I don't think wealthier businesses should pay more in taxes. However, I do believe that all businesses that have achieved a certain level of success and stability should pay a proportionately similar share of taxes. Which I guess raises the question -- how do we determine this threshold?
Joe Mattausch: While no one likes to pay more taxes, I still subscribe to the idea that as a business or individual becomes more successful, they should bear a proportionately larger share of the tax burden.
Joe Albanese: I think wealthier businesses should be sure to take care of their employees. The multiplier effect of that extra dollar paid to a faithful employee that contributes to the success of a business will help the economy far more than the 35-50 percent of it that would be paid to the government via taxes.