Tech start-ups compare notes with Joe the Plumber

Will Joe the Plumber's tax message resonate in Silicon Valley?

Joe Wurzelbacher, an Ohio plumber considering whether to buy a business, turned into an unlikely media star this week after he confronted Sen. Barack Obama over the Democratic presidential nominee's tax proposal.

Obama maintains that his plan would reduce personal income taxes on 95 percent of the wage earners in the United States. But after an Obama appearance at Holland, Ohio, Wurzelbacher told Obama that his tax plan would take money out of his pocket.

That was the beginning of Wurzelbacher's 15 minutes of fame. His name came up 26 times during Wednesday night's presidential debate between Obama and Sen. John McCain, who argued that a tax hike would slow any economic recovery and hurt job growth. McCain also said the tax plan would unfairly redistribute money earned by small businesses, essentially penalizing them for being successful.

Given their libertarian, government-get-out-of-my-way predilections, technology entrepreneurs would seem to have much in common with being penalized for their success. But the surface similarities only go so far.

For one, if you're making $250,000 a year in Ohio, you're living large. If you're earning that much in Silicon Valley (or other high-priced tech hotbeds like New York and Los Angeles), you're just middle class. And then you've got to worry about paying down that crazy mortgage. It's not as if start-ups are pleading to pay more in taxes. Instead, they have more pressing items on their agendas.

"At this stage in our business, we need to put our money into growth and innovation. We would benefit from the hiring credit we have heard about in Obama's plans. Access to health insurance is also much more important to us than a small change in that tax rate," said Mary Mangan, president of OpenHelix.

"I started going to a lot of entrepreneur events before I went out on my own. At every one of those events people asked me what I was going to do about health insurance. Not a single one of them ever asked me about taxes. In starting up a business you are just not making that much in the early days."

Most technology start-ups--particularly, those that receive funding--are going to be structured as corporations, which changes the tax structure. Someone in the position of "Joe the Plumber" would likely establish a Limited Liability Company or similar structure which would treat earnings as personal income.

I heard variations on that theme from many start-ups that confessed to being more anxious about how long it's taking to fix the nation's economic woes. What start-ups want to see is an economic policy that helps the economy recover rapidly.

"A quicker economic recovery will more than make up for a several hundred dollar increase in taxes my company will pay under Obama's plan," said Brett Klasko, the founder and CEO of Phinaz Media & Marketing. "As you can imagine, we have to fight a lot harder for each marketing dollar during rough economic times. A recovery will increase our revenue far beyond any potential increase in taxes."

Like most tech start-ups, Phinaz Media & Marketing doesn't provide health insurance to employees. Klasko believes that if Obama or McCain can lower health care premiums and provide a tax cut to small businesses that offer health care to their employees, he may be able to justify the cost of giving employees access to a company health plan.

"This would certainly increase morale and could, in turn, increase productivity," he said.

With the presidential campaign winding down, the speculation is getting ahead of the reality. First, Obama's not guaranteed victory on November 4. And in the event of an Obama presidency, we'd only know whether his tax policy was a success or failure months later.

But if the political scenario does indeed work out in Obama's favor, his team will encounter a different start-up landscape from the one the Democrats remember from the Clinton administration. The lean and nimble Web 2.0 companies that dot the tech constellation can easily move their operations to more tax-friendly venues if they deem the new team in Washington to be antibusiness.

"There other options for companies to set up businesses elsewhere," said Anthony Franco, president of EffectiveUI. "If the plan is to raise taxes on small businesses, there are options to go offshore...As an entrepreneur, it's something you'd take a look at it."

With globalization and broadband proliferation, start-ups are forging international linkages--whether in sales or software development. And as Franco noted, that presents opportunities should push come to shove.

"This is not about patriotism or whether I love this country," Franco said. "It's what makes sense for this business as an entity. It would take a significant amount for us to consider doing anything outside of the U.S. But what is also true is that if it costs you $1 million year in taxes to stay in the U.S. and you can operate (the business outside of the country) for $200,000, there are companies that would consider that."