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Georgia’s Small Businesses and the Individual Income Tax

2 min readBy: Jared Walczak

In a recent critique of proposed individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. reductions in Georgia, the Georgia Budget and Policy Institute (GBPI) questioned the suggestion that lower rates were important to small businesses, emphasizing that “most taxpayers aren’t small businesses with employees,” pointing out that “[o]nly 2.7 percent of all personal income taxpayers nationwide are owners of bona fide small businesses with employees other than the owners.” This claim isn’t wrong, but it can be misleading.

We might just as well say that 95 percent of all businesses pay under individual rather than corporate income taxes, which is equally true but also incomplete. Or, if we want to drill down to a more reasonable number, we might observe that pass-through businesses—those where income “passes through” to the individual income taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. form, like S Corporations, LLCs, other partnerships, and sole proprietorships—are responsible for nearly 39 percent of business receipts nationwide.

In Georgia, 41 percent of all employees work for pass-through businesses, compared to 48 percent working for traditional C Corporations. The remainder work for governmental entities and nonprofits. Similarly, pass-through businesses are responsible for 33 percent of payroll in the state (compared to 57 percent for C Corporations). And while small businesses aren’t the same as pass-through businesses (there are some large pass-through entities and small C Corporations) it’s worth noting here that 97.7 percent of Georgia businesses are small businesses. In short, pass-through income constitutes a meaningful share of income subject to the state’s individual income tax, and its effects extend to a large percentage of the broader economy.

The GBPI criticism also dismisses nonemployer pass-through businesses, which consist of an individual or individuals who work for themselves but don’t have employees. And while it’s true that these represent a modest share of Georgia’s total economy, the $32 billion in economic activity for which they were responsible in 2014 isn’t nothing.

It’s true, of course, that most individual income tax filers don’t own businesses. But it’s equally true that 41 percent of all Georgia employees work for businesses subject to the individual (and not the corporate) income tax code. A statistic can be found for every occasion and point of view, but if we’re concerned with the potential effects of an income tax cut on economic activity, it would be hard to find a statistic less suited to the task than the one chosen by GBPI.