Dan the Part-Time Blogger Takes On Joe the Plumber

At some point I'm going to write a blog post about all of the incredibly annoying catch phrases that have been used throughout this debate: "Wall Street, not Main Street", "more of the same", "change", "maverick", "Joe Six-pack", etc. On Wednesday night, McCain added one more to my ever-growing list: Joe the Plumber.

Now, I have nothing to say about this guy Joe personally. He seems like a nice enough guy, a registered Republican who voted for Huckabee, a hard-working, middle-class family man doing the blue-collar thing. And I hope he's able to buy the business he's looking for (although he should look into squaring up this license issue with his union). But McCain has taken this guy and turned him into the centerpiece of his argument against "tax and spend" Obama. Unfortunately for the senator from Arizona, he has once again chosen to base his bloated rhetoric on misleading data and faulty logic.

For those who haven't been following too closely, let's break down the actual issue. In his stump speeches McCain has been making the claim that Obama will "tax half the income of small businesses in America," a charge estimated to affect approximately 50% of all small businesses. This would supposedly occur because Obama plans on "increasing" taxes on singles who make over $200,000 a year or couples who make over $250,000.

Let's deal with the second part first. In this economic crisis the jobs that small businesses create are essential for helping to reverse the downturn (can I say recession yet?), so why would Obama want to tax so many of them? The answer: he won't. The number of small businesses who actually meet the criteria for seeing higher taxes is faaaar lower than the number the McCain camp is quoting, and this report from CNN Money explains why:

To make its claim, according to a McCain spokesman, the campaign counts as a small-business owner any taxpayer who files a Schedule C, E or F - the forms used to report gains and losses from business ventures and farms. Using that definition and citing IRS data, the campaign notes that "56.8% of total small business income is earned by businesses in the top two rates, which Barack Obama has pledged to raise."

But most people who file those forms don't run a business for a living: Those forms are also used to report income from freelance and consulting work, real-estate rentals, and most other non-salary sources. For example, McCain and Obama both file Schedule C returns, thanks to their book royalties - but they hardly should be considered small business owners. In 2005, there were 21.5 million Schedule C returns filed, according to the IRS. A more realistic definition of small businesses turns up far fewer firms. The Small Business Administration estimates that there were 6 million small businesses in 2005, as measured by those with fewer than 500 employees and with staff on the payroll other than the owner.

So small businesses are actually a subset of those who file Schedules C, E, or F. In other words, to reach his figure of over 50% of small businesses, McCain is actually including people who do not actually own small businesses. CNN Money goes on to present the true percentage of people who would be affected:

Second, even using the broad definition of small business that McCain likes, very few owners would see their own taxes rise. That's because the lion's share of taxable income comes from a small number of wealthy businesses. Out of 34.7 million filers with business income on Schedules C, E or F, 479,000 filers fall into the top two brackets, according to an analysis of projected 2009 filings by the nonpartisan Tax Policy Center. The other 34.3 million - or 98.6% - would be unaffected by Obama's proposed rate hike.

To recap: Obama's tax plan will only affect 2 - 3% of small business owners (this based on McCain's own definition), and not half of them as McCain has been claiming.

Second, I'll deal with the first. McCain made the specious claim that Obama would tax "half the income" of small businesses. This is patently false. More from the CNN Money report:

...even if you're one of the rare business owners making enough money to be affected by Obama's proposed tax increases, you still won't see a big hike in your tax bill. McCain's claim that Obama "will increase taxes on 50% of small business revenue" - the line he used in the second presidential debate - is incorrect because of how income is taxed.

"While Obama does favor raising the top two rates, the quote is not true because not all the small business income of those in the top two rates is taxed at the 33% and 35% rates," said Gerald Prante, a senior economist at the nonpartisan Tax Foundation.

Dean Baker, co-director of the Center for Economic and Policy Research in Washington, DC, had this to say on the matter:

According to the New York Times, Mr. Wurzelbacher says that he is planning to buy a plumbing business that has profits of between $250,000 and $280,000 a year. While this income would put Mr. Wurzelbacher above the threshold where he could expect to pay higher taxes under Senator Obama's tax plan, the increase in his tax bill would be relatively modest. Under Senator Obama's plan, the tax on income above $250,000 would increase by 3 percentage points from 33 percent to 36 percent. This means that Mr. Wurzelbacher could expect to see his tax bill rise by between $0-$900, assuming that this plumbing business would be his entire taxable income. If he has additional taxable income, then he would see a larger increase in his taxes.

To sum up: under Obama's tax plan, 2% of small businesses would see a 3% increase in the taxes applied to their income above the cutoff. Well geez, I hope ol' Joe would be able to afford his new trucks and employees now that he's paying an additional $75 a month in taxes...

Still, Obama is not faultless in this entire ordeal, in my humble opinion. Though I don't disagree with his tax plan (we've had a progressive tax scale for as long as I can remember), I think he did generate unnecessary attention with what I'm calling "Spread-the-Wealth"-gate. Of all the ways to answer Joe's question, his best answer was "we're trying to spread the wealth"? C'mon?! What he should have done was paraphrased what I've shared above: "Yes, your taxes will go up - a whopping $900 a month. Don't worry, I think you're gonna make it." Ah well...things were looking too good to last.

All in all, I think Plumbergate makes for a perfectly fine theoretical debate between conservative and liberal or progressive thinkers as to what the best tax structure is (progressive, flat, national sales, etc.). But if you're going to attack either one's actual policy, it needs to be on the merits of said policy, and this time McCain's claims aren't substantiated.

Don't worry though - he'll keep spouting them off.

NOTE: For more sites examining the Plumbergate fiasco (I think I like that name), I looked at FactCheck.org, Politifact.com, CNN's Political Ticker, and About.com.

UPDATE: Want to know what will happen to your taxes if Obama or McCain takes office? Here's a site where you can apparently put in your 2008 tax information and find out how the candidates plans will affect your taxes over their first term. Also, Obama has a tax calculator on his website, but it's a little boolean for my taste. I'm not sure of anything similar of McCain - does anyone know if he has one?