Don't Mess With Taxes

The presidential election clock is ticking down. You know what that means. We're running out of time to look at Joe the Plumber's tax bill!

Last week, Samuel C. Thompson, Jr., professor of law at Penn State's Dickinson School of Law and founder and director of the university's Center for the Study of Mergers and Acquisitions, examined the potential taxes that Joe Wurzelbacher (aka Joe the Plumber) might pay if Sen. Barack Obama is elected and his tax plan is implemented as presented.

As part of Penn State's "Election 2008: Issues Forum and Voters' Rights," Thompson presented Joe the Plumber and the $4.60 Progressivity Debate. He looked at what tax Joe might pay under Obama if Joe did indeed own a business that made more than $350,000 per year.

Thompson's number crunching revealed:

Under the current Internal Revenue Code, for each $100 Joe earns over $350,000, he would pay a tax of $35. Under Senator Obama's tax plan, for every $100 Joe earns over $350,000, he would pay a tax of $39.60. Thus, Senator Obama's plan would tax Joe an additional $4.60 for each $100 Joe makes over $350,000, and this $4.60 is the basis of the argument around Joe the Plumber.

Fair or foul increase? The next logical questions are what would be the economic effect of the increase in tax on Joe's income and would it be fair?

Sen. John McCain says the additional $4.60 per $100 earned over $350,000 will destroy jobs in small businesses. Thompson says that argument "is flat wrong for at least three reasons."

1. Eighty percent of those subject to a tax increase are not owners of small businesses.

2. Similar arguments were made in 1993 against efforts to increase the top marginal rate from 35 percent to 39.6 percent, but that tax increase was followed by the greatest economic boom since World War II.

3. Apart from the 1990s, the two highest periods of economic growth since the depression were from 1941-1944 and from 1962-1969, during which the top marginal tax rates were significantly higher than they are today.

Therefore, says Thompson, McCain's claim that increasing the top marginal rate from 35 percent to 39.6 percent  is going to lead to a loss of jobs is a "gross overstatement."

Essentially, argues Thompson, Obama's plan follows our current progressive tax system.

"Different people have different views of fairness," says Thompson. "However, throughout the history of the income tax the rates have been progressive, meaning that the more a person has in taxable income, the more the person pays proportionately in tax."

"Since we have always had a progressive income tax system, most informed Americans would likely think that such a system is fair."

You can read Thompson's two-page PDF summary or view his 30-page PowerPoint presentation for more details. And a big tip of the hat to TaxProf for the notice this look at Joe the Plumber's possible tax bill.

Tax Carnival on the way: For all you Tax Carnival fans awaiting our 42nd edition, don't worry! It will be here later today.

The hubby and I headed north over the weekend for a brief break and I left the laptop at home. I have some errands to run this morning, but will dive head-first into the Tax Carnival submissions when I return.

And before the day is over, the latest Carnival of Taxes will be posted! Thanks for your understanding and patience.