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.
