When I first heard of Joe the Plumber, I identified with him. Six years ago, I worked at a little shop and hoped to buy it. Like Joe, I had NO IDEA of what sort of tax ramifications there might be to such a purchase. Like Joe, I believed that a democratic administration would make my tax (and therefore profit, growth, etc) situation worse.
So when Sen. McCain threw out Joe’s story, I was interested. He said the plumbing business he hoped to buy “made” $270k. Now in order for the owner of this business to have a tax increase under Sen. Obama’s tax proposal, the company’s “Net profit before owner compensation” would have to be $270k, as this is the what a business owner pays taxes on (of course equipment purchases lead to depreciation which could lower the taxable amount… but that’s more detail than this post needs) Admittedly, i don’t know much about the plumbing business… but let’s assume that from an overhead, payroll, and cost of goods standpoint, it is similar to the printing business… one that i DO know something about.
in 2006-7 (the most recent period for which full data is available) The AVERAGE “Net Profit Before Owner Compensation” in the printing business was 13.5% of gross sales. The profit “leaders” — the most profitable 25% of all printing — firms was 23%. If Joe’s plumbing business is “average,” the company’s gross sales would have to be about 2 million dollars (13.5% of $2,000,000 is $270,000). If it’s among the best (from a profit standpoint), It would need to gross almost 1.2 million. Anyway… this is more or less where I assumed Joe was: purchasing a business with between 1.2 and 2 million dollars gross sales. Certainly, his taxes might go up.
As it turns out, the company’s gross sales were something like $270k (some are now reporting $100k, which strikes me as improbable… such a firm could not afford to employ Joe at $40k). Assuming it’s one of the best run companies in the country, the net profit before owner compensation would be about $62,000. Almost certainly a tax CUT for Joe, under Obama’s proposals.
Joe says it’s not the current situation he’s concerned about, but his FUTURE. When he buys this firm and it grows to 1.2 to 2 million dollars in gross sales, he doesn’t want to be unfairly taxed on his success. Fair enough, I guess. I wonder if Joe has any idea of how to grow a plumbing business from $300k to $2 million? I’m not saying it can’t be done… just that it takes a lot more than 14 hour days. It takes that AND business accumen AND salesmanship, AND marketing ability AND great credit, AND more.
So let’s say he has all that, and uses it to his best advantage, and becomes one of the 5% of small business owners pulling out more than $250,000. His “punishment,” for success, under the Obama tax plan works out to about $900. And when considering all of the tax BREAKS Joe got while is income climbed to that amount, I don’t think that 900 bucks is really out of line.
I don’t know many small business owners who do as well as Joe aspires to do (in fact I know only one). That’s not to say that my peers are not successful –in fact most of them are– just that they’re just not as successful as Joe plans to be. I asked the single associate who pulls out more than $250K (He owns a printing firm about the size of Reno Type in CA) what he thinks about paying more taxes under Obama. Turns out he has no problem with it. I guess when you make that much money, $900 really isn’t so much.
Joe…. I wish you luck. In fact, I’m going to help you. While your company is growing, you’re gonna need some printing. A company in a growth phase is going to have to allocate at least 3-4% of gross sales to marketing (more if you’re a plumber… have you seen what the yellow pages charges for full-page ads?), and a portion of that ought to be direct mail… something we’re really good at here. I’ll make you a deal. So long as you buy your printing and mailing from Reno Type (remember, advertising is an expense, so it lowers your net profit and therefore taxes!) I’ll give you $900 in free printing every year that you make more than $250k. My reward will balance out Obama’s “punishment.” What do you say?
By the way…. I’m a registered Republican, and a business owner who aspires to make over $250k. I support Barack Obama.