Obama and Joe Biden keep repeating that they don’t know many plumbers who make $250,000.
Joe the Plumber noted that he wasn’t talking about his current income; he was talking about the income he hopes to make if and when he runs his own business.
Yesterday I heard a bit of audio from The View, and Joy Behar (I think) declared that Joe was “fantasizing.” Remember that the next time you hear a salute to the American Dream.
Whoopi Goldberg charged that Joe and the others have a problem with progressive taxation, and that’s not quite right. The system is actually much less progressive than it seems.
Right now, if you’re the richest of the rich, you have the resources to hire teams of accountants to determine every last deduction, loophole, filing advantage and tax shelter. And if you’re that rich – the Bill Gateses, the Teresa Heinz-Kerrys, the Jon Corzines, the Paris Hiltons and yes, the Cindy McCains — you really rarely have to worry that your tax bite is going to affect your lifestyle.
Those folks might resent the title “the idle rich” but that’s who most people have in mind when they talk about “the rich.” Then there’s the “working rich,” those making a lot more than the median income but still quite far from “champagne wishes and caviar dreams.” Let’s say your small business starts booming and after years of hard work, you’re now making what you’ve always perceived as “real money” — let’s go beyond the $250,000 to $350,000.
Your income tax will go up from 35 percent to 39.6 percent. On the first $102,000, and then on every dollar after $250,000, the Social Security tax rate will be 12.4 percent. (It is 6.2 for those who aren’t self-employed.)
You’re keeping 48 cents out of every dollar you’re making after $250,000 — and that’s before state income taxes, anywhere from none in seven states to 5.3 percent in Massachusetts to 9.3 percent in California (10.4 if your income exceeds a million).
In Ohio, Joe the Plumber would be looking at an additional 6.24 percent on income after he made $200,000. In Holland, the village in which he lives, he has an additional 2.25 percent.
So Joe would be earning 39.5 cents on the dollar for every dollar he made after $250,000.
It’s tougher in other parts of the country. If you live in New York City, you pay a state income tax of 8.14 percent and a city income tax up to 4 percent. In those circumstances, you’re keeping a little over thirty-five cents of every dollar you make after $250,000.
And we haven’t even gotten to any property or car taxes.
Obama is aiming for Paris Hilton and he’s hitting the guy who runs the company that tiles her bathroom.
UPDATE: Campaign Spot reader Paul writes in, “You forgot Medicare. That would be another 1.45 percent (2.9 percent for the self-employed) on each and every dollar from the first to the last.” So poor Joe is down to 36.6 cents on every dollar.
ANOTHER UPDATE: I knew this post was going to draw out the accountants and self-employed.
First, from Ohio:
Don’t forget workers comp and unemployment insurance. I just started turning a profit on my small one man business in Ohio and now I get the priveledge of paying about 1k a year to Ohio Jobs and Family services… about 2.7%. I’d love to leave Ohio.
I’m a long time reader, and had a comment on your calculations for this post. I’m a 38 year old self-employed software developer, so I have alittle background on this. You mentioned that self-employed people pay the full 12.4% social security tax. You also left out the 5.4% tax for Medicare. Note that these payroll taxes are only on “payroll” that you receive, and not necessarily on all income. Most self-employed people create an S-Corp or LLC to avoid these taxes. They have their income go to the business, and then they pay themselves a salary less than total income, which is subject to Social Security and Medicare taxes. The company then makes distributions of its profits to them as the primary shareholder. These distributions are not subject to the payroll taxes. The key is to pay yourself enough salary to not raise any flags with the IRS, but to avoid the payroll taxes. The drawback is that you won’t receive as much in social security benefits, but I suspect I’d never receive everything I’m promised by the time I retire, anyways. (I’m still mad that W.’s social security reform didn’t go through!) One other note, social security taxes are only applied to the first $102K of salary received in 2008, although the medicare taxes apply to the entire salary, if someone who is self employed doesn’t go the S-Corp/LLC route.
Let me start off by saying I want a flat tax of 20% and any other tax system is inherently unfair and inefficient.
That being said, your analysis is wrong for a few reasons:
1. The social security tax of 12.4% won’t be applicable to the income above $250,000. Obama has said he would have a 2-4% tax above $250K*. And that would be started 10 years from now. Granted, he could be full of shit and probably is, but let’s assume he is telling the truth. So that 48% becomes more like 58%. Still outrageously high but not as bad as you make it out to be.
2. Whatever the SS rate is above $250K, it is a moot point for small business owners like Joe. The owner of the company does not – or at least should not if he’s smart – pay payroll taxes on that much income. He should pay himself a salary on which he pays payroll tax and take the rest of the profits as dividends on which there is no payroll tax. No sane small business owner will pay himself a salary of $250K as a plumber. $60K, maybe $70K is all he’d pay payroll taxes on. The people getting hit by an increase in payroll taxes will be salaried employees making that much money…doctors employed by hospitals, lawyers employed by firms (as opposed to partners), execs at Goldman Sach, etc. Those are the people who should be running scared, not a plumbing business owner.
3. The additional state tax is not a full rate since it is deductible from federal taxes. So if I pay 6% marginal state tax rate and pay a 39% fed marginal rate, my state tax is really only 61% of 6% or 3.66% on my last dollar earned.
Problem is most people don’t understand any of this. I doubt even McCain or Obama understand any of this There are people out there who think that if they get a tax refund check from H&R Block that means they pay no taxes. Ask 100 people what their marginal tax rate bracket is and I doubt 20 could tell you. I doubt 20 could even tell you what a marginal tax rate even is.
And it is that stupidity displayed by Americans that will lead to an Obama presidency with a 60+ Dem Senate as well. People deserve the politicians they elect, and Americans are getting what’s coming to them.
On the first point, I would note that in June, Obama was talking about applying the full 12.4 percent in Social Security taxes on income beyond $250,000.