Capital & Credit Watch

Obama's Personal Income Tax Hikes and Small Business

by Raymond J. Keating

Amidst all of the political talk from the Obama White House of boosting small business, the reality remains that a huge tax increase looms at the end of the year that will hit small businesses hard.

On the personal income tax front under the Obama plan, the two top rates increase - the 33% rate increases to 36%, and the 35% rate to 39.6% rate. This will affect incomes over $200,000 for single taxpayers, and $250,000 for married taxpayers.

And it will pertain to most businesses, as most firms (as sole proprietorships, partnerships, S-Corps, etc.) pay the personal income tax, rather than the corporate income tax. In fact, according to the latest IRS data (2007), 93.4% of businesses pay the personal income tax.

Looking at 2008 individual tax return data from the IRS, Americans for Tax Reform reported the following on July 26:

• "There were 30 million tax returns reporting small business income in 2008. On net (profits reduced by losses), these owners reported business profits of $631 billion. A large chunk of this net profit--$457 billion-faced taxation in households making more than $200,000 per year. A majority of small business profits will face a tax rate hike under the Obama-Pelosi-Reid plan."

• "There were 22 million tax returns reporting sole proprietor income in 2008. On net (profits reduced by losses), these owners reported business profits of $264 billion. A large chunk of this net profit--$90 billion-faced taxation in households making more than $200,000 per year. 34 percent of sole proprietor profits will face a tax rate hike under the Obama-Pelosi-Reid tax hike plan."

• "There were 8 million partners and S-corporation shareholders in 2008. On net (profits reduced by losses), these owners reported business profits of $367 billion. Virtually all of this profit faced taxation in households making more than $200,000 per year."

These Obama tax increases serve as a direct cost or drain on small businesses. In turn, fewer resources are available to be invested in either labor or capital. That, in turn, means less business creation and expansion, reduced innovation, restrained invention, fewer gains for consumers, and less job creation. After all, most job creation - roughly two-thirds of annual net new employment - comes from small businesses.

All of the pro-small business rhetoric in politics cannot change the harsh economic reality of these tax increases for small businesses and the overall economy.

_______

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.