Millionaire Tax is Still a Tax on Small Business

October 05, 2011

Senate Democrats proposed today a 5.0 5.6 percent surtax on the "rich," where they define rich as someone who makes a $1M or more.   Senator Schumer was instrumental in moving the threshold from $250,000 to $1M, apparently because he recognizes the impact it would have on small business, since much of this income is "passed through" to individuals and taxed as personal income (about 57 percent of business income is pass-through income): 

On Wednesday, Schumer said raising taxes on families earning more than $250,000 a year, as Obama has long supported, would affect small businesses, an argument that is more associated with Republicans than Democrats.

"It also would affect too many small businesses if you drew the line below a million dollars," he said. "There are businesses, small businesses, that struggle. So we believe the million dollars is the right line because in many parts of the country there are two-income households that earn that much. That doesn't make them rich."

However, the millionaire tax would still affect about 35 percent of pass-through business income, and at least 140,000 taxpayers that report this business income, according to the most recent IRS data.  In 2009 there were 141,035 millionaires with income from partnerships or S-corporations, 39,662 with income from sole propietorships, and 1,840 with income from farms.  The chart below shows that the income from these businesses represent about one third of total income for millionaires (those with adjusted gross income of $1M or more). [Click chart to enlarge.]

The key lesson is that taxing the "rich" through our personal income tax code neccesarily means taxing business, including small business, since the majority of business income is reported as personal income.  That means a lot of businesses that were thinking of expanding and hiring are now thinking they'll get hit with a new tax.  Does this seem fair to the 14 million Americans who are unemployed?

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