Obama Designs a Tax Plan to Prevent New Jobs

President Obama introduced his plan to “pay for” his so-called “American Jobs Act” with a classic political straddle:

Nobody wants to punish success in America…this is the land of opportunity. That’s great. All I’m saying is that those who have done well, including me, should pay our fair share in taxes to contribute to the nation that made our success possible.

In other words, don’t accuse me of wanting to punish success even though I seek to increase the tax on success.  Obama’s effort to encourage us to resent the most successful and blame them for America’s lost prosperity may turn out to be good politics.  But it is also a negative, destructive prescription that will make our problems worse.

Everyone agrees that small business is the primary source of new jobs in America.  Most Americans would oppose tax increases on small business at the very moment when job creation is critical.

Yet Obama’s latest campaign theme, calling for “the rich” – meaning those who earn more than $200,000 – to pay their “fair share” – meaning “MORE!” – would directly target the larger of small businesses, those with the most employees and the potential to create the most new jobs.

Obama’s communication is designed to influence the great majority of voters who earn income in the form of salaries and wages and are not familiar with the way the tax code treats small businesses.

Most small businesses are organized as sole proprietorships, partnerships, Sub-chapter S corporations or LLCs.  All of these forms of ownership are required to report business sales, expenses and profits on the personal tax returns of the owners.  Thus, if a small business generates more than $200,000 in profits in a good year, the tax code enables Obama to include its owner in the category he calls “America’s most fortunate who aren’t paying their fair share,” even if the owner decides to reinvest half or more of his profits in expanding his business and hiring new employees.

The IRS publishes statistics that provide context for Obama’s “tax fairness” ideas.  As the first chart above shows, two-thirds of taxpayers earning over $200,000 – the group Obama has promised since 2008 to hit with a tax hike – are small business owners.

The second chart shows that 70% of all small business income is earned by people in the over-200,000 tax brackets.

Small businesses have always grown more by reinvesting profits than by borrowing from banks.  Thus it’s hard to conceive of a tax increase that could more directly diminish the ability of successful small businesses to expand and create jobs than Obama’s plan to target “the most fortunate” defined as anyone whose tax return shows more than $200,000 of income – even if it’s from small business profits, even if the owner plans to reinvest a large portion of those profits.

The notion that somehow “fairness” requires this group to be hit with tax hikes is absurd.  This tiny minority not only provide most of the new jobs in America each year they already pay half the income tax.

In 2009, the most recent statistics reported by the IRS, only 2.8% of taxpayers earned over $200,000 but they paid 50.2% of all income tax revenue.

One last point: Some of the over-$200,000 taxpayers make their income by exploiting political connections.  Their political advantage should be abolished by making government much smaller and less powerful.  If appropriate they should be prosecuted.  A tax increase that also punishes the honest, the industrious, the innovative, the diligent and those without political advantages is just plain stupid.

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