by JS O’Brien

Dear Joe the Plumber,

Welcome to your 15 minutes of fame. It’s not everyone who gets his name mentioned 286 times in a presidential debate. If you haven’t already, you simply must change your business’s name to Joe the Plumber. That’s just good marketing. Oh, and don’t forget to add the tag line, “As seen on TV!”

OK, Joe, so you had a conversation with Barack Obama and, while media reports are very sketchy about exactly what your circumstances are (not surprising), it appears you want to buy a business that “brings in” more than $250,000. I have yet to find out if “brings in” means $250,000 in revenue or profit (a very important distinction, Joe), but let’s assume for a moment that it’s profit we’re talking about. Under Barack Obama’s plan (as sketchy as it is on his website), a good guess would be that you would go into a higher tax bracket, paying about 3.6% more in taxes on every dollar you earn over $250,000, for a total marginal tax rate of 39.6% — exactly the same as it was in the 1990s.

But let’s take a closer look at your situation, shall we Joe?

You say you’re planning to buy this business, and it must be a very large small business, indeed, if it covers salaries, expenses, trucks, inventory and the like and still yields a $250,000 + profit. I’m going to guess that you don’t have the cash to buy this business outright, Joe, and if you do, I think you’re holding back on us. I think you’ve inherited some money. But let’s assume that you’re borrowing a fair amount of money to buy the business, using its book value (what the business is worth if you sold all the assets and paid off all your debts) as security and using the revenue stream to pay off the loan. Let’s also assume a business this size is incorporated.

Here’s what you do, Joe. First off, you have your corporation pay you a salary of, say, $249,000 per year. Now you’re not in the higher marginal tax bracket, right? Payments on the loan you took out to buy the business are fully tax deductible, so profits will be reduced by that amount. If you still have more than $250,000 in profit, we’re talking about a rather large business here, and probably a very large down payment (which suggests that you can manipulate your down payment to reduce your taxes, doesn’t it?)

But here’s the thing, Joe. When you own a business, you can do all kinds of things to reduce taxable income (profit). For instance, you can buy more equipment, which can then be depreciated over the years, providing a tax deduction and increasing the company’s book value and, thus, your wealth. Even fully depreciated equipment can generally be sold, in the future, for something. You can spend more money on advertising and hire on a new plumber or two. The advertising costs and the employment costs are generally fully tax deductible. Well, let me take that back. If you provide your employees with health insurance, your costs for health insurance won’t be tax deductible under John McCain’s plan, but who’s counting, right?

By advertising and hiring on, you can drastically increase your revenues (the amount of money coming in) while keeping profits below the $250,000 mark. The increased revenues will make the resale value of your business much higher than it already is, increasing your wealth without getting taxed on that increase. If you want to take more wealth out right now without paying taxes, there is a cornucopia of tax-free or tax-deferred retirement options, benefits, and the like that can move money right around the IRS’s outstretched palm.

Eventually, Joe, your company will be so large, and you will be so wealthy, than an extra 3.5 pennies in tax on each dollar on income you earn over $250,000 will be chickenfeed to you (if it isn’t already). But, hey, it’s up to you. Increase the underlying wealth in your company without paying taxes, or take cash now and pay a few additional taxes on it.

But, please, don’t complain to me about paying more taxes. All it says to me is that you’re not smart enough to run your business’s financial side.

All the best to you and yours,

JS O’Brien

UPDATE

It turns out that Joe is not a good businessman for a simple reason: He doesn’t own a business, appears to have no immediate prospects to do so, has no plumber’s license, works for a small firm doing residential work (which means his employer is unlikely to be clearing $250k per year), and has occasionally talked to the owner about buying the business — someday.

Poor Joe. He’s about to get ripped to shreds by the media, and he seems like a pretty decent guy. I feel for him.

On the other hand, Joe is a great example of those who are so terrified that they’ll get rich some day and owe an extra 3.5 cents on every dollar over $250,000 that they spend a lot of time worrying about it. Joe doesn’t know that he is unlikely ever to make that kind of money.

UPDATE #2

It just gets better and better. Bloomberg is reporting that Joe owes around $1200 in back taxes, and there is an Ohio lien filed against him.