Patrick's Rants



9/15/2010

The Tax Debate

Filed under: Money,Taxes — site admin @ 7:56 pm

When you hear the “families making more than $250,000.00” as the threshold for potential tax cuts what do you think? Do you think that means that they earn $250,000.00 and then subtract their home mortgage and charitable donations? You would be wrong. You would also be wrong if you thought Joe the Plumber was upset about the potential to gross $250k and have to pay taxes on all of it.

You would be wrong if you believe the argument that taxing those making more than $250k would reduce hiring or small company spending. The truth is that whatever you spend your company funds on – as long as it’s ordinary and necessary – reduces your tax bill. Let me restate that. Any small company owner that says they are holding off on hiring because of the potential for their tax bill to go up – on taxable income (taxable meaning the part that’s left over after paying business expenses) – is disingenuous, a liar, uninformed or perhaps greedy.

Here’s a simple example: company A (a pretty small company) grosses $30,000/month in retail sales. Assuming a markup of 30% approximately $23,000 goes to inventory. Cheap rent might be as low as $500.00 for a smallish shop; utilities maybe another $150. That leaves $6350 in the shop owner’s pocket. Subtract a barely over minimum wage full time employee (assume the owner keeps whatever is left) at around $2,000/mo and business insurance and there’s only $4350 left. I’m not counting a lot of business expenses that the owner could have, but you can see how this business that grosses $360,000 year leaves the owner with $48k/year. Guess which tax bracket this owner is in? If s/he’s married and has a child, next to nothing.

To be left with over $250k taxable income you aren’t talking about most people’s idea of a small business anymore. You aren’t even talking about Congress’ idea of a small business anymore.

Let’s look at Joe the (lying) Plumber’s business. Suppose that he really did have the opportunity to buy a plumbing business. Let’s say that Joe has three or four trucks which means he has three or four plumbers and himself. He also has a dispatcher to take phone calls and make appointments and maybe someone to do billing part time and a part time bookkeeper. Maybe the part time billing person is his son who works after school so doesn’t really get paid much. The bookkeeper might be his wife (until she found out he lied to a sitting Senator that is) who only takes a little pay from time to time. If he offers any kind of after hours emergency services he has an answering service of some kind.

Let’s say his business runs pretty non-stop if it’s possible in this current economy. Four full time plumbers, how does Joe pay them? He could pay them per job or just an hourly rate. Joe’s a generous guy so he pays his guys by the hour (we’ll look at the other way further on). For simplicity sake, I’m pulling the average salary from salary.com for the Phoenix area. At $45k – $57k the mean falls about $51k/year. Without ever paying for gas, Joe the Plumber is broke at $51k/year. Joe’s Plumbing Service needs to bill $204,000.00 just to keep his guys employed. Forget about even filing an income tax return, just fill out this application. If the average service call ticket is $60 just to show up and $40/hr for three hours labor each plumber has to go to something like 1.13 service calls per day just to pay his own salary and have two weeks vacation.

Building rent is going to run about $36,000 for the year, utilities $6,000. Truck payments are around $14,400 per year. Gas could be $80,000. And Joe hasn’t even gotten a check yet, or paid his lazy son or his pissed off wife or the dispatcher. Since he can’t get away with not paying the dispatcher he shells out another $35k/year. Joe’s (rounded) portion of payroll taxes is $18,283. He’s up to $393,683 and he hasn’t even turned a profit (ignoring how the trucks are deducted). And what are his income taxes at this point? A big gigantic $0. See where the scare might be coming in? The Repugnicans are trying to say Joe’s taxes are going up under the “Obama plan” – which is really the Bush planned obsolescence plan. Remember that Dubya pushed for tax cuts but only until 2011, when someone else could be blamed for the rising taxes and the morbidly obese deficit. So Joe is going to have to get another truck and hit the commodes himself or let one of his guys go. Add another $3,600 in truck payments and $4,800 in fuel to his expenses for a total of $402,083.

If Joe manages to push his plumbers to 1.3 to 1.5 jobs per day (remember they have to drive between jobs) at $180/job and we throw in Joe’s own labor he’s only up to $337,500 in gross sales. In fact Joe has to push his guys and himself to an average of 2 jobs per day to even tread water. That puts him up to $450,000.00 per year. And that leaves about $45k that Joe can take out of the business himself. For simplicity sake I’m going to assume that Joe is responsible and made estimated payments and paid into Social Security for himself for the year (insisting that payroll taxes are part of Joe’s tax bill are fallacious, if you get a payroll check you pay them, unless you are a thief and a liar). If it’s just Joe and his wife and his ungrateful son is over 17 years old, Joe’s tax bill is about $2,100 (and I rounded that up) a mere 4.7% of his paycheck. Tell me again how “small businesses will be affected” by raising taxes on those making over $250k? Joe is almost to half a million gross sales. It’s all about the net income and no one seems to want to talk about that. Probably because it can’t be boiled down to a sound bite. For this to affect Joe, he has to add many more trucks, plumbers, office staff and a larger building for all of the parts and pieces and specialized tools that plumbers inevitably need. Each new plumber and truck runs Joe about $63,400 and can bill $90,000. It’s not the taxes keeping Joe down, it’s the basic overhead.

So how much will Joe have to actually bill to take home $250k? Somewhere around $1,000,000. You read that right, around one million dollars per year in labor, not including a small markup on parts. That works out to ten plumbers plus him.
$1,000,000
– 634,000 plumber wages
– 92,400 11 Trucks and gas
– 60,000 Building rent (Joe has to have a bigger building
for all those trucks and parts)
– 10,000 Utilities – bigger building, bigger utility bill
– 37,677 Wages for three full time office staff.
= 165,923 Whoops! Guess Joe’s gonna have to double his prices which means $2,000,000.00 in gross labor charges. Which means an average charge of $60.00 to show up and $80.00 per hour for three hours labor. $2 million. And Joe doesn’t pay tax on the whole $331,846. He subtracts his standard deduction (or home mortgage expense etc.) and his lazy son from his return. That leaves him paying 95,340 (2009 tax tables) which is 28.7% of his net business income (and ignores social security and medicare taxes because everyone pays those, except liars and thieves). Mind you Joe knows a lot of tricks to reduce his taxes, like stick a bunch of money into a retirement plan for himself and his wife and pretend his son is on his payroll full time just to slough a bunch of money into an IRA that his son will use tax free for college. He’ll also slap a “Joe’s Plumbing” magnet on the side of his regular car and write the whole car payment off as “advertising”. And he’ll do whatever he can to pay for health insurance for his family while he leaves his employees twisting in the wind. (I know this because he supported McCain)

So boohoo, don’t cry for Joe. To get to the $250,000 threshold of the “small business that will be hurt” and won’t hire a peon minimum wage employee he’s billing over $2 million. And he’s doing it on the backs of middle class employees.

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