Fact check: Plumber Joe's taxes
McCain has entrepreneurs spooked about tax hikes, but fewer than 2% of small business owners would pay more under Obama's plan.
By Stacy Cowley
Last Updated: October 16, 2008: 12:30 PM ET
(CNNMoney.com) -- In speech after speech, presidential candidate John McCain hammers on the claim that his rival Barack Obama will raise taxes on many small businesses.
At the debate on Wednesday night, McCain said, "The small businesses that we're talking about would receive an increase in their taxes right now."
More typically he has said: "What [Obama] hasn't told you is that he would tax half of the income of small businesses in America," a line used in La Crosse, Wisc., last week.
Should small business owners fear for their wallets if Obama is elected? Not the vast majority, business and tax experts say.
To make its claim, according to a McCain spokesman, the campaign counts as a small-business owner any taxpayer who files a Schedule C, E or F - the forms used to report gains and losses from business ventures and farms.
Using that definition and citing IRS data, the campaign notes that "56.8% of total small business income is earned by businesses in the top two rates, which Barack Obama has pledged to raise."
It's true that Obama has proposed raising taxes on the top two income rates.
But there are three main problems with McCain's charge.
What is a small business?
First, it relies on a broad definition of what counts as a small business, including everyone who files a Schedule C, E and F.
But most people who file those forms don't run a business for a living: Those forms are also used to report income from freelance and consulting work, real-estate rentals, and most other non-salary sources.
For example, McCain and Obama both file Schedule C returns, thanks to their book royalties - but they hardly should be considered small business owners.
In 2005, there were 21.5 million Schedule C returns filed, according to the IRS.
A more realistic definition of small businesses turns up far fewer firms. The Small Business Administration estimates that there were 6 million small businesses in 2005, as measured by those with fewer than 500 employees and with staff on the payroll other than the owner.
Who pays?
Second, even using the broad definition of small business that McCain likes, very few owners would see their own taxes rise.
That's because the lion's share of taxable income comes from a small number of wealthy businesses. Out of 34.7 million filers with business income on Schedules C, E or F, 479,000 filers fall into the top two brackets, according to an analysis of projected 2009 filings by the nonpartisan Tax Policy Center.
The other 34.3 million - or 98.6% - would be unaffected by Obama's proposed rate hike.
That includes Joe "The Plumber" Wurzelbacher, whom McCain invoked nearly two dozen times at the debate Wednesday night to illustrate the plight of the average worker and small business owner.
"Joe wants to buy the business that he has been in for all of these years ... he wanted to buy the business but he looked at your tax plan and he saw that he was going to pay much higher taxes," McCain said.
In an interview afterward with WTOL, Wurzelbacher acknowledged that he'd still like to eventually buy the plumbing company he works for but that he wouldn't yet be hit by higher taxes.
"I want to set the record straight: Currently I would not fall into Barack Obama's $250,000-plus," he said. "But if I'm lucky in business and taxes don't go up then maybe I can grow the business and be in that tax bracket - well, let me rephrase it. Hopefully, that tax won't be there."
Few owners are that lucky in business. In a member survey conducted late last year, the National Federation of Independent Business (NFIB) found that only 14% of respondents said they had $200,000 or more in annual income.
As Tax Policy Center fellow Len Berman recently toldFortune Small Business: "Most owners of small businesses have small incomes."
What gets taxed?
Third, even if you're one of the rare business owners making enough money to be affected by Obama's proposed tax increases, you still won't see a big hike in your tax bill.
McCain's claim that Obama "will increase taxes on 50% of small business revenue" - the line he used in the second presidential debate - is incorrect because of how income is taxed.
If a business owner falls into the top bracket, that doesn't mean that all of his or her income is taxed at the highest level.
For example: If a small-business owner makes $210,000 in taxable income, he edges into the 33% bracket, one of the two top tax rates that Obama would like to raise.
But he would pay the higher tax only on the amount that exceeds the cutoff - in 2007, the two top tax rates applied to single filers with income of $160,850 or more and joint filers with income of at least $195,850. As a single filer, this business owner would see his federal taxes increase $1,475 under Obama's plan, which calls for raising the 33% tax rate to 36%.
"While Obama does favor raising the top two rates, the quote is not true because not all the small business income of those in the top two rates is taxed at the 33% and 35% rates," said Gerald Prante, a senior economist at the nonpartisan Tax Foundation.
The bottom line: McCain's claim only works by using an overly broad definition of what counts as a "small business" - and even with that definition, fewer than 2% of business owners would be hit by Obama's proposed rate increase. For those who are affected, the increase would be levied only on a part of their earnings, not all of them.
CNNMoney.com writer Emily Maltby contributed to this report.
- posted on 10/16/2008
McCain's best hope: Joe the plumber
Many time-tested tactics have failed John McCain in his race for the presidency. With 19 days to go, he's hoping a blunt Ohioan can help him close the gap.
By Nina Easton, Washington bureau chief
Last Updated: October 16, 2008: 2:47 PM ET
WASHINGTON (Fortune) -- John McCain has tried to paint his Democratic opponent as a big-spending, big-taxing liberal. In normal times, this would have been an effective strategy; large swathes of Americans - especially the independent voters still up for grabs - are wary of a politician with a voting record as liberal as that of the junior senator from Illinois.
But these are not normal times.
How do you condemn Obama as a Big-Government Liberal when your fellow Republicans in the White House are busily nationalizing portions of the country's biggest banks, bailing out the world's largest insurer, taking over semi-private mortgage securities firms - and, along the way, putting several hundred billion dollars in taxpayer money at risk? When your own plan, borrowed from Hillary Clinton, commands the Treasury Department to spend $300 billion to buy up home mortgages from people who can't make their payments?
So in Wednesday's debate, McCain shifted tactics to accuse Obama of being one of those liberals eager to take your hard-earned wealth and redistribute it to those less hard working or less fortunate. And that's when we got to meet Joe the Plumber, whose name came up 26 times in the course of 90 minutes.
Joe is Joe Wurzelbacher, a Toledo, Ohio plumber who showed up at an Obama rally to challenge the Democrat's tax policies. Wurzelbacher wants to buy the business where he works but says he's worried that, if the company is successful, he'll face higher taxes. Obama has said that he'll cut taxes for those making under $250,000 but that people making more than that would see an increase.
'Spread the wealth around'
"It's not that I want to punish your success," Obama told him in an episode captured on a TV camera. "I just want to make sure that everybody who is behind you, that they've got a chance for success too...I think when you spread the wealth around, it's good for everybody."
Obama's "spread the wealth around" response was McCain's first weapon out of the box, and his most effective one of the evening. "The whole premise behind Senator Obama's plans are class warfare, let's spread the wealth around," McCain said. "Why would you want to increase anybody's taxes right now...when these small business people, like Joe the plumber, are going to create jobs, unless you take that money from him and spread the wealth around."
Judging by McCain's Cheshire grin, and repeated replays of Joe's story (later in the debate he said Obama's health plan would penalize Joe; Obama said it wouldn't), the Arizona senator clearly thought this could be his "game-changing" moment - that the discovery of a video-clip capturing Obama's exchange with Joe would reset a presidential race that seems headed toward a solid Obama victory.
Maybe. Joe the Plumber did put a face on a critique of Obama that McCain hasn't been very effective at making before now - not only reminding independent voters that the Democrat wants to "spread the wealth" but also that Obama's tax plans, which he repeatedly says would mean cuts for 95% of Americans, would hurt profitable small businesses that are the biggest job producers in the country, and the likely engine of any economic recovery.
Joe is already proving an able media surrogate for McCain, even more so since he won't say which candidate he plans to vote for. His story and photo are all over the national press today. CBS' Katie Couric snagged an interview last night in which Wurzelbacher said, "I've always wanted to ask one of these guys a question and really corner them and get them to answer a question...for once instead of tap dancing around it."
"Unfortunately," he added in pointed attack on Obama, "I asked the question but I still got the tap dance."
A tall order
But it's a tall order to ask Joe to turn around the McCain campaign with only 19 days to go. The Real Clear Politics average shows Obama leading by seven points nationally. He has a wide lead in improbable places like Virginia, and is more narrowly ahead in important battlegrounds like Florida and Ohio.
Most tellingly, perhaps, is this week's New York Times/CBS poll, which found that roughly 7 in 10 voters think Obama has the right kind of "temperament and personality" to be president, while just over half said that of McCain. Last night, Obama played a cool, calm, unflustered defense - guarding his baseline while his opponent scrambled and sweated all over the tennis court. That performance will likely reinforce the sense that it is Obama, less so McCain, who has a presidential temperament.
But McCain's biggest problem lies outside his control. Despite unprecedented federal interventions into the financial markets, the Dow Jones dropped 733 points Wednesday and Federal Reserve Chair Ben Bernanke warned of painful economic times ahead. A tanking economy hurts McCain's prospects, but it also robs him of his best line of attack on Obama; that his tax plan will stifle an economic recovery.
McCain may think of himself as a "free-market" Republican, but like his GOP colleagues in the Bush administration he has had to set that aside to become a "safe-market" Republican. All that expensive government activism on the part of Republicans in the past few weeks makes Obama's latest plan to spend another $60 billion - on top of the $115 billion he already proposed to stimulate the economy - look like chump change. McCain himself this week proposed another $52 billion in spending for short-term relief.
That leaves McCain with few other places to go on attack. Last night he tried again to hang '60s terrorist William Ayers on Obama - polls suggest that doesn't work. He's tried to dismiss Obama as inexperienced, untraveled, unready to be president - the CBS poll suggests that hasn't worked.
So now it's Joe's turn. We'll see if that works.
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