September 13, 2010

Over One-Third of New Tax Revenue Would Come from Business Income If High-Income Personal Tax Cuts Expire

Download Special Report No. 185

Special Report No. 185

Key Findings

• The frequently cited statistic that only 2 or 3 percent of tax returns with business income pay tax in the top two brackets and would face higher tax rates in 2011 is factually accurate but misleading. Those 2 or 3 percent represent the fortunes of larger, growing, profitable businesses whose continued prosperity is important to economic recovery.

• Assuming that business income is the last dollar of income a taxpayer earns, Tax Foundation economists estimate that 39 per­cent of the $629 billion tax increase on high-income taxpayers proposed in the Obama 2011 budget would be extracted from business income. Over ten years then, an extra $246 billion would be taken out of business income.

• In 2007, the federal government taxed more business income under the individual income tax code than under the traditional corporate tax code.

• More than 74 percent of tax filers in the highest tax bracket report business income, compared to 20 percent of those at the lowest bracket.

• Of the roughly $864 billion in taxable business income reported on individual tax returns in 2008, nearly 68 percent was claimed by taxpayers earning over $200,000 and 35 percent was claimed by taxpayers earning over $1 million.

A 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.

A tax bracket is the range of incomes taxed at given rates, which typically differ depending on filing status. In a progressive individual or corporate income tax system, rates rise as income increases. There are seven federal individual income tax brackets; the federal corporate income tax system is flat.