Washington's 'tax the rich' shell game

With Washington on the hook to fix the nation's dangerous fiscal situation, "tax the rich!" has become a favorite, feel-good mantra for many. After all, why cut spending when it would be so easy for wealthy Americans to send in a little more of all that money they have laying around?

As it turns out, Washington has glossed over a few truths on this one.

Generally, the "rich" on whom Washington suggests we raise taxes are Americans making more than $250,000 per year. To most Americans, who make less than a quarter of this, it probably sounds reasonable for the federal government to demand from them a bigger cut. But many who would be caught in the net are far from the Warren Buffett-like industry kings Washington likes to portray.

Here's the catch: Just because a small business is able to take in $250,000 in a given year, it certainly doesn't mean the small business owner is taking home a quarter-million-dollar salary.

In fact, most small businesses -- as many as 75 percent, according to the National Federation of Independent Business -- are organized as "pass-through entities," such as sole proprietorships, S corporations, limited-liability companies or partnerships. In these organizations, owners report business income on their individual tax returns. On paper, this may make the business owner appear "wealthy." In fact, that's rarely the case.

Take a closer look at that business owner's situation and you'll see they're already paying income taxes at higher marginal levels than most taxpayers; they're also paying payroll taxes, as well as payroll taxes on the salaries and wages paid to their workers.

Of course, small business owners also pay taxes on their home and business property, sales tax on the goods they use or sell in their business, taxes on the energy their business uses and various state and local taxes or fees. They're also subject to countless federal, state and local regulations that are often costly to comply with.

In many cases, small business owners pour personal money into the company in order to keep the doors open. It's not hard to find a small business owner who, in recent memory, has taken money from personal savings to meet payroll.

If you still think raising taxes on the rich (small businesses) is a good idea, consider this: In your community, these business owners create jobs, spend money and provide tax revenues. As small businesses create nearly 65 percent of all American jobs, the better these small businesses do, the better off our communities and the federal government are. Getting businesses growing and creating jobs is, after all, what we're all aiming for.

Unfortunately, too few in Washington have hands-on experience in running a private-sector business. Lacking such expertise, they may pursue policies that, however well-intentioned, hurt small businesses and further depress job creation -- in short, exactly the opposite of what the nation needs. I liken this to being able to give you a recipe for a cake, but never having cooked the cake. So many in Washington can give theory on issues from poverty eradication to taxes, but they have no experience in doing it.

So, however reasonable it sounds for a politician to call for raising taxes on people making $250,000 a year, we've got to keep in mind they're talking about raising taxes on a lot of small business owners and the workers, communities and other businesses they help support, all of whom can ill afford to take another hit.

Finally, raising taxes to "fix" the deficit doesn't actually fix anything. The problem is the decades of gross overspending that have created the now-yearly trillion-dollar deficits -- and combined national debt of more than $14 trillion and growing. Shoveling more fuel, via higher taxes, into the engine of the already out-of-control train of federal spending is not a good plan. (Washington's record of simply using new tax revenues for even more spending -- rather than deficit reduction -- makes this proposal even more dangerous.) And again, it just puts off dealing with the real problem: Washington overspending.

No surprise, Washington wants you to look somewhere else to point the blame for its own overspending -- in this case, to those who create jobs. But while raising taxes on someone else -- in this case, the so-called "rich" -- may sound like a reasonable solution to our nation's deficit problem, don't be fooled by this tried-and-failed Washington shell game.

We need small businesses to maintain and create jobs, spend money in our communities and provide tax revenues long into the future.

Taxing these businesses' incentive to grow -- or ability to keep their doors open -- is a dangerously shortsighted plan for disaster.

J.C. Watts (JCWatts01@jcwatts.com) is chairman of J.C. Watts Companies, a business consulting group. He is former chairman of the Republican Conference of the U.S. House, where he served as an Oklahoma representative from 1995 to 2002. He writes twice monthly for the Review-Journal.