Thursday, October 16, 2008

Joe the Plumber

So far this election cycle, I have avoided bringing partisan politics into my blog. But the arguments in last night's presidential debate really made me angry. And I only watched ten minutes of it.

John McCain posited that his tax plan is better using the same argument that George Bush made before him and which goes back to the Reagan doctrine of trickle down economics. Specifically, McCain said that under Obama's tax plan, Joe the plumber, a man wanting to buy his own plumbing business and live the "American dream," would have to pay more taxes under Obama's plan and would therefore be unable to afford to hire more employees.

Now I have no problem with quibbling over who pays more taxes under what plan--those are worthwhile discussions to have. But when McCain claims that higher income taxes give money to the government that would otherwise go to paying employees, thereby stifling job creation, he simply doesn't know what he's talking about.

Quick tax accounting lesson: Individuals pay taxes based on income, however, only on the the income that is net of deductions (personal exemptions, mortgage and student loan interest, certain medical expenses, etc.) Likewise, corporations only pay taxes on their net income (revenue minus cost) not on their gross revenue. Paying employees is a cost, and therefore a tax deduction.

Whether a business owner has his business structured as a C-corporation, where the business pays taxes on profits at the corporate rate, or as an S-corporation, LLC/LLP, or sole proprietership, where the profits of the business flow through to the owner and the owner is taxed at her personal tax rate, the tax rate has no bearing on whether or not you can afford to hire an employee. That's because tax is figured on revenue minus cost, and the wages paid to the employee reduce taxable income.

Theoretically if tax rates are higher and the business owner wants to pay less in taxes, it's in his best interest to hire more employees, thereby lowering net income and tax liability. In reality it doesn't actually work this way, but that's beside the point when analyzing McCain's argument. The bottom line, though, is that arguing that higher tax rates stifle job creation makes no sense and is nothing more than a hollow scare tactic intended to frighten middle class Americans.

You'd think after watching the debate for ten minutes I'd be done with my criticism, but I'm not. In the discussion portion of the very same topic, McCain went on to talk about how this housing crisis was caused by Fannie and Freddie giving loans to people who couldn't afford to pay them (an indirect dig at the Clinton administration), but that the solution was for the government to use some of the $700+ Billion that we are borrowing from China to bail out our banks and go in and buy those loans from the banks and refinance them with a lower principal.

If I understand the argument, Clinton was wrong to encourage Fannie and Freddie to make those loans in the first place, so the solution is for the rest of the taxpayers to foot the bill of forgiving the portion of the loans the owners can't afford to pay. Then, instead of using the $700+ Billion to buy illiquid securities or equity positions in banks, both of which have the potential to regain value and return that value to taxpayers, returning to us some or all of the $700+ Billion, we should just give it away and leave taxpayers on the hook for the whole wad.

Basically the McCain solution to the housing bubble is to create a taxpayer-funded floor to said bubble. What happens when that floor goes away or when the good old US of A can't afford its mortgage payments? That day has got to be around the corner if we're going to pay for all this by lowering taxes for the wealthiest 20% of Americans.

I'm sorry, Mr. McCain, but none of your economic proposals make any sense to me. Perhaps it makes sense to Joe the Plumber. But if it does, then both of you are on the list of people who don't know their elbow from their anus when it comes to finance and economics. By the way, was it owning your own home or owning your own business that is the American dream? Because I was confused on that point.

Of course, I don't mean to just pick on John McCain here. It would seem that he's the only one in the line of fire, but as a rule, I'm an equal opportunity offender when it comes to picking on anyone who says something that's totally stupid, illogical, or patently untrue. So now it's Barack's turn.

Obama mentioned that all of his spending proposals around healthcare and job creation and renewable energy and so forth should be funded on a pay-as-you-go basis. That's a great idea, but I'm guessing Michelle must be in charge of the household budget and hasn't had a chance to let her hubby know that he's going to need to do some trimming or else make more money. Either that, or Obama is just that bad at arithmetic. I know it's tough once you get beyond seven figures, but even if you wanted to knock off the last nine digits and round to the nearest billion on everything, we'd probably still be OK. As long as the budget was balanced.

So in a few more weeks (or for people like me who plan on voting early, in the next few days) we get to choose the next leader of the free world. Well kind of. Our friends in the EU might take issue with that assertion. Either way, our choices are between a guy who couldn't do his own taxes and a guy who is bad enough at arithmetic that he couldn't balance his own checkbook. If you still haven't made up your mind, you can go to this quiz for help. That's how I decided. I chose 9 of 13 statements from one candidate, so that's the name I'll be marking down. The electoral votes in my state are going to McCain no matter what, so maybe I'll just ride my bike instead.


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