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Millionaire Tax is Still a Tax on Small Business

2 min readBy: William McBride

Senate Democrats proposed today a 5.0 5.6 percent surtaxA surtax is an additional tax levied on top of an already existing business or individual tax and can have a flat or progressive rate structure. Surtaxes are typically enacted to fund a specific program or initiative, whereas revenue from broader-based taxes, like the individual income tax, typically cover a multitude of programs and services. 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 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. would still affect about 35 percent of pass-through businessA pass-through business is a sole proprietorship, partnership, or S corporation that is not subject to the corporate income tax; instead, this business reports its income on the individual income tax returns of the owners and is taxed at individual income tax rates. 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 incomeFor individuals, gross income is the total pre-tax earnings from wages, tips, investments, interest, and other forms of income and is also referred to as “gross pay.” For businesses, gross income is total revenue minus cost of goods sold and is also known as “gross profit” or “gross margin.” 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?