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A Half Century of Small Business Federal Income Tax Rates and Collections

1 min readBy: Gary Leff, Arthur P. Hall, Ph.D.

Download Special Report No. 61

Executive Summary

Since 1950, small businesses have, on an average annual basis, paid about nine percent of the 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. es imposed by the federal government. On average over the past 45 years, “small” C corporations have paid 2.34 percent of all federal corporate income taxes; small businesses not structured as c corporations have paid 11.52 percent of all federal 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. es.

Small businesses are defined here to include sole proprietorships, farms, partnerships, S corporationAn S corporation is a business entity which elects to pass business income and losses through to its shareholders. The shareholders are then responsible for paying individual income taxes on this income. Unlike subchapter C corporations, an S corporation (S corp) is not subject to the corporate income tax (CIT). s, and corporations having assets of approximately $1 million or less in constant 1994 dollars. Over the course of forty-five tax years from 1950 to 1994 there has been a large amount of fluctuation in the average income tax paid by such businesses. These fluctuations have had three fundamental causes: changes in tax rates, changes in the definition of taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income. , and trend changes in the overall economy.