The Job-Killer Tax

Tax Policy: The only issue in this week's talks between President Obama and congressional Republicans is whether to extend all the Bush tax cuts or just those on the middle class. Anything less than all will be a failure.

Tuesday's two-hour meeting produced no agreement. Obama tried to sound chipper, calling the meeting "civil." But he warned, "There's no doubt ... differences will remain, no matter how many meetings we have."

Well, the only real difference, as Rep. Eric Cantor noted earlier in the day, is that Republicans "don't think that taxes should go up." That includes those who earn the most income. That last bit is a major sticking point.

Unfortunately, Obama seems imprisoned by his party's enduring myth that the top earners in our economy somehow get off scot-free without paying taxes while the rest of us pay big time. This is nonsense — easily disprovable by a quick look at the IRS' own income-tax statistics. They show that the very highest incomes — the top 3% — pay more of the total income tax bill today than ever.

In 2008, they paid 51.5% of all income taxes, though they earned just 28.8% of the income. In 2001, by comparison, they paid 46.2% of all income taxes, and earned 26.1% of income.

Under Obama's plan, top tax rates on the highest incomes will rise to 39.6% from about 35% now. And that doesn't count the jump in capital gains tax rates to 20% from 15%.

But this isn't just about giving rich people a tax cut, as Obama's party claims; it's about jobs and small businesses at a time when America needs both.

What many Americans don't know is the very people sneered at by the Democrats as "the rich" are in fact the most likely to start or fund a new business — or to expand a small enterprise. As economist Alan Viard of the American Enterprise Institute recently noted: "Households with incomes above $200,000 received 47% of the taxable interest income, 60% of the dividends, and a staggering 84% of the net capital gains reported on tax returns."

In other words, these people are investors and entrepreneurs. This is key, since small businesses and startups account for the bulk of all new jobs — 80% by some accounts. It's why letting taxes rise on higher earners is a bad idea for all.

Data from the National Federation of Independent Business show that 75% of all small businesses are so-called "pass-through entities" — partnerships, sole proprietors, S corporations and other set-ups. A lot of those small-business profits are declared on personal income tax returns by wealthy taxpayers.

How much? In 2011, Congress' Joint Committee on Taxation estimates taxpayers subject to the higher rates President Obama wants will earn 50% of all small-business income.

As such, a tax hike on the wealthy at this sensitive juncture in the economy's recovery would be damaging, killing off new business formation and encouraging small-business owners who often operate on a slender profit margin to lay off even more workers.

At a time of 9.6% unemployment, and with nearly 30 million people either unemployed or unable to find full-time work, letting taxes rise on the job-creators is plain foolish. And it could quite easily push the economy into a second deep downturn.

Obama gets a lot of traction by claiming he "inherited" a bad economy. But if he creates a new job-killing tax on small businesses and entrepreneurs, the next recession will be his and his alone.