Which Candidate's Tax Plan Helps Small Business

Oct. 17, 2008— -- Small-business owners across the country can relate to the plight of Joe the Plumber, an Ohio resident trying to figure out if Barack Obama or John McCain has the best tax policy for his prospective company.

Samuel Joseph Wurzelbacher got his 15 minutes of fame Wednesday night when McCain invoked his story as part of a critique of Obama's economic plans.

Earlier in the week, Wurzelbacher confronted Obama about his proposal to raise taxes for couples earning more than $250,000, saying that it could hurt him as a small-business owner. It appears that Wurzelbacher actually earns a lot less, and might benefit from Obama's plan, but the issue was suddenly thrown in the national spotlight.

So, which presidential candidate's tax policy would actually be best for small businesses?

It all depends on what you call a small business.

Three lawyers in a partnership would be considered a small business, with each member possibly earning more than $250,000 a year.

But so could a lone roofer, earning, say, $80,000 a year.

"Most people like Joe aren't going to be taxed more heavily under the Obama plan," said Roberton Williams, principal research associate and economist with the Tax Policy Center, a joint venture between The Urban Institute and the Brookings Institution, nonpartisan think tanks. "It's just the most successful of the small business or these professional partnerships."

But Alan Reynolds, a senior fellow at the libertarian Cato Institute and former director of economic research at the conservative Hudson Institute, believes that even lower-income wage earners should care.

"I'm not going to be too happy with Obama's proposal even if I don't make 250,000 bucks. Why? Because I hope to," Reynolds said. "That's what the American dream is all about."

There are 27.2 million small businesses in the United States, according to the Small Business Administration. Of those, only 6 million firms, or about 22 percent, had employees. The rest were sole propitiator companies, according to the government.

The vast majority of these companies earn less than $250,000 a year.

Most small businesses file individual tax returns. (The others file as corporations.) The Internal Revenue Service does not have detailed income information about which taxpayers are small-businessowners and which ones are employees. But the overall numbers show just how few Americans earn more than the Obama tax-hike threshold.

Most Small Businesses Earn Less

In tax year 2006, 138.4 million tax returns were filed by Americans. Only 2.9 percent -- a little more than 4 million tax filers -- reported earning more than $200,000. (The IRS does not have data for the $250,000 mark.)

Small-businessowners do tend to earn more than the general population but a majority of them still do not earn above $200,000 or $250,000.

The National Federation of Independent Business found that 14 percent of those surveyed earn $200,000 or more. Those who did tended to own larger businesses. For instance, of those with 20 to 249 employees, 32 percent earned $250,000.

Some small businesses do file corporation taxes. McCain has proposed cutting the top income tax rate for corporations from 35 percent to 25 percent.

Williams said that cut wouldn't help most small businesses.

"Only the biggest corporations would benefit from McCain's cut," he said.

The Health-Care Divide

Both candidates also have health-care plans that could impact small-businessowners and their bottom line.

McCain wants to replace income tax exclusions for employer-sponsored insurance with a refundable tax credit of up to $5,000 for individuals.

Obama wants to force employers to offer health insurance and require those who don't to pay a fee to the government to cover those employees. But he says he would exempt small businesses from the so-called "pay or play" requirement.

The question is who qualifies for the small-business exemption.

"That's the problem," economist Williams said. "We don't know. There is nothing in the plan that says what is a small firm. Is it 10 workers? Is it 25 workers? Is it 100 workers? There's absolutely nothing there."

In the end, the difference really comes down to a larger philosophic debate: Should people be rewarded for success or should they take part of that success and redistribute it to those who are earning less.

That leaves small-businessowners like Joe the Plumber asking: How successful do I think I will be and where should my money go?