Snarky Behavior

Joe the Plumber(s)

October 20, 2008 · Leave a Comment

l this talk about small business and income above $250,000 got me thinking… hey, I used to work for a small business. I wonder how the Presidential candidates’ respective tax plans would effect them?

I realized though, that there really is no “Joe the Plumber” at my old firm.  Before she passed away, the CEO established an “Employee Stock Ownership Plan,” (ESOP) devolving her ownership to the employees.  Individually, the employees should be able to make tax-exempt “contributions” (i.e. purchase shares of stock) without any changes… this policy should remain untouched regardless of who becomes President.

In terms of the firm, and somebody should definitely check me on this, my understanding is that there are significant tax deductions to be had on pre-tax contributions to the fund.  Additionally, both Obama and McCain are proposing to eliminate capital gains taxes on small businesses, so any realized gains in the value of the shares currently held by the firm would also be exempt from taxation.

What about the $250,000 threshold?  Again, I should be checked on this, but my understanding of tax burdens and incentives is that because there are tax-deductions for pre-tax contributions to the ESOP, it would make sense for the firm to pay dividends on the Net Operating Profit (NOP) up to that threshold.  The company is essentially paying down a leveraged loan used to buy-out the previous owner, and both the interest and principal are tax-deductible.  (Lots of deductions here going on here).  So, depending on the structure of the businessess, that seems like an appropriate amount of money to carry forward year-over-year.

So basically, my understanding is that the “Joe the Plumber” model does not apply.  It would if there were a single owner who received all of the after-tax earnings, but since the company is employee-owned, if anything, the Obama tax-plan seems like a better alternative because it encourages the firm to pay-out dividends below the $250,000 threshold.

Note:  I am nowhere near 100% confident this interpretation is correct.

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