Obama's Plan Better for Joe-the-Plumber and Jobs: Just Run the Numbers!

The airwaves and netroots have been full of wild criticisms and claims about the impact of Barack Obama's tax proposals on small businesses like Joe-the-Plumber ("JtP"). Stupidly, too much vitriol has been directed at Joe himself, questioning whether he really is going to buy a business, and focusing on whether or not he is licensed.

C'mon. Give the guy a break. In fact, giving Joe a break is exactly what Barack Obama's tax proposals do.

Our prized "pundits" prefer heat to light. It's what keeps them in business. But is it too much to ask that someone, someplace, sometime, actually runs a few simple numbers to see what the implications really are?

If JtP's business earns less than $250,000 after all deductions and expenses, then there is no point in this analysis. Obama's tax plan provides tax relief for net incomes under $250,000.

Let us assume, therefore, that the business does earn more than #250,000, in fact, it does so well that it hires another worker (in the US, that is).

JtP will pay that worker a salary, plus benefits. Let us assume that the two together are $65,000.

Each employee generates some additional costs -- space, desks, paper, ink, gasoline for the truck, equipment to do the jobs. Let us be conservative, and assume that is only another $5000.

So, the total cost of hiring the worker is $70,000. JtP would not hire that worker unless doing so would at least pay for itself -- i.e., the JtP business would grow by at least $70,000 in revenues.

What about taxes? Well, that $70,000 of additional income is offset by the $70,000 in expenses for hiring and employing the worker. So, no matter what the tax rate, there is no increase in taxes, because there is no increase in net profits. Are you with me so far?

But, Obama gives JtP a $3000 credit on its taxes for hiring the employee. Thus JtP saves taxes by hiring an employee who adds nothing to profits but whose work pays for his own salary. Not a bad deal for JtP.

How much additional profit, over and above his salary, does the additional employee have to generate before the 4% higher tax rate Obama proposes on incomes above $250,000 actually increases JtP's taxes compared to the current Bush/McCain tax rates?

The answer is more than $75,000 over an above the $70,000 in salary, benefits and consumables the employee generates. (4% of $75,000 = $3000 of increased taxes, offset by the $3000 credit.)

That is, a total of an addition $145,000 to the business. Up to $145,000 of additional revenues, with the $3000 credit, JtP has hired a worker, expanded the business, and not paid one penny additional tax under the Obama plan.

How many workers add $145,000 to the total revenues of a company? If he worked 40 hours per week, all 52 weeks per year, without a holiday, and charged $70 per hour, and was fully-deployed for all 40 hours every week, he would bring in another $145,000. That assumes no unscheduled time, and no administrative time, each unrealistic assumptions.

At $145,000 additional revenues to the business, JtP would have done as well under the Obama plan as under current tax policy.

And, at anything less than adding $145,000 to total revenues, JtP pays lower taxes under the Obama plan because of the $3000 tax credit.

Which plan makes it more likely for JtP to add another employee?

Which plan, then, is more likely to increase employment?

Of course, if Joe's PR strategy works, if his book deal goes through, if he cuts a record... well, then he's a celebrity, and, like other celebrities, he will not even notice the additional 4% on income over $250,000 -- no one did during the Clinton years, and we were all wealthier then.

But, if he ever returns to plumbing, Joe's business will do much better under Obama's plan. And, if he decides to sell his business and live the good life -- and let us say he gets 2X revenues with that additional employee, he would receive nearly $800,000 for the business--under Obama's elimination of capital gains taxes it would save him $120,000 for his retirement.

Joe, are you here?