As the 2008 Presidential election draws closer still, with just a little over two weeks before the big day, Republican John McCain and Democrat Barack Obama have locked horns on the single most misunderstood issue of the entire campaign: taxes. The campaign rhetoric has reached a redundant pitch where the McCain campaign has brought out the unlikely hero of Joe Wurzelbacher, commonly known as “Joe the Plumber.”

This is obviously a different kind of Joe from the “Joe Sixpack” from Sarah Palin’s disastrous, wink-wink performance in the Vice Presidential debate. In the third Presidential debate last week, McCain invoked the Iowa plumber, who asked Obama if his taxes would increase if he bought a business that had an income of $250,000.

Obama’s response was that any revenue over $250,000 would be taxed at 39 percent instead of 35 percent.

This conversation lasted for more than five minutes. One much-maligned comment was, as McCain summed it up, that Obama said we should “spread the wealth around.” Naturally, this phrase immediately invoked a battle cry of anti-socialist rhetoric from republican pundits. However, when the statement is put back into context, it helps to explain Obama’s point of view.

“My attitude is this, if the economy is good for the folks on the bottom-up, it’s gonna be good for everybody. If you’ve got a plumbing business, then you’re going to be better off if you’ve got a whole bunch of customers who can afford to hire you. Right now, everybody is so pinched that business is bad for everybody. And I think when we spread the wealth around, it’s good for everybody.”

Watch the full video here.

He later told that Wurzelbacher that he’d remove the capital gains taxes for small business, and as a result could possibly pay less taxes than he would now. But that’s not the point. Those who malign Obama’s tax policy speak of the “income” of small businesses like that of Mr. Wurzelbacher’s potential buy-out.

Here’s the question: Would that $250,000 be gross income, or net profit?

And yes, there IS a difference. There’s a simple fact of Federal tax plans, and it’s this: the proposed 39% tax bracket is for net profit. Even a simple review of the required forms illustrates just what is really taxed under Obama’s or any other tax plan.

So what’s the “net profit?” Simple. If an S-Corporation files form 1120-S as they’re required by the IRS to do, then they enter their gross receipts on line 1c. Once the appropriate deductions are applied (including inventory, payroll, advertising, interest, rent, the final amount is applied on line 22a. The taxes are then determined by the figure on line 22a, NOT the total gross income, which is on line 1c.

Since this article is a little dry with its number crunching, let’s break it down. An S-corporation (which many small businesses are) must pay federal taxes on its net profit — or final profit — not its gross receipts. It’s state and local governments. Quite simply, the cost of running a business is deducted from your total receipts.

Put simply, if a business has total gross receipts of $250,000, then they’d deduct their “Cost of Goods Sold,” and then finally their business expenses. The remaining amount could be as little as $40,000 or $60,000. That would be the amount taxed, not the quarter of a million dollars that was taken in.

Profit is exactly that – profit. It’s what’s left over after all other expenses are paid, and that’s what is taxed. Not the gross receipts. In fact, there’s a very good chance that the S-Corp’s owner has his salary already deducted from the receipts.

If the American public would take the time to research the issue, then we’d all know the clear truth that the Obama tax plan proposes an increase of a whopping three percent tax increase for those who generally wouldn’t miss it. How much would a person (or business) pay if they have that kind of a net income? Right now, at 36%, it’s 90,000. If it’s raised to 39%, then it goes up to $97,500.

Naturally, someone who has a net income of $250,000 would be a little stung by that extra $7,500, but the reality is that anyone with a competent accountant would be able to live very comfortably off that amount, especially assuming that they’ve itemized their deductions (like interest paid on their primary mortgage), etc. This would be a total increase of $625 per month… which is pocket change for those in that higher tax bracket.

Let’s be fair. The Obama tax plan would benefit well over eighty percent of the general public, and would put money back into the pockets of those of us who actually shop for groceries, and might need to replace an old washer and dryer… which is a major purchase for nearly all of us, presumably even Joe the Plumber.

Sadly, the McCain campaign will distort these simple facts as it has so many others. Maybe a little truth will start to break through to reveal some common sense.

Senator Obama’s complete tax plan can be viewed here.

UPDATE: It looks like I’m not the only one to see the obvious. has also explored this issue and stated that only 2% of small business owners in 2007 would be affected by Obama’s tax increase:

It’s not clear from the exchange just what Joe means when he says the business “makes” up to $280,000 a year. Is he talking about total revenue? Profits? That’s an important point here and it’s one that Obama and Joe the Plumber never discussed. Based on Obama’s proposals and current tax policy, for Joe’s taxes to rise Joe would have to “make” $250,000 in net profit, after deducting all his expenses: his employees’ pay, his supplies, his truck, his fuel costs, and other legitimate business expenses. He’d have to be an extremely successful plumber.

Well, there we go again. Common sense. Who’d have thought?

Tagged with →