In a speech today outlining his policy prescriptions for reducing deficit, President Obama is expected to renew his call for raising the top 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. rates on high-income families. As we reported in a study last September, such a tax hike would largely impact taxpayers with business income.
Here are some basic facts on taxpayers and business income[1]:
The frequently cited statistic that raising the top tax rates would “only” impact 2 or 3 percent of tax returns is misleading. Those 2 or 3 percent represent the most profitable and growing “flow-through” businesses that are key to economic recovery.
More than 74 percent of tax filers in the highest tax bracketA 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. report business income, compared to 20 percent of those at the lowest bracket. More than 40 percent of private business income is earned by taxpayers paying the top marginal rate.
Of the roughly $864 billion in taxable business income reported on individual tax returns in 2008, nearly 68 percent was claimed on by taxpayers earning over $200,000 and 35 percent was claimed by those earning over $1 million.
In 2007, the federal government taxed more business income under the 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. code than under the traditional corporate tax code.
More than half of all corporations today are so-called S-corporations rather than traditional C-corporations. Owners of S-corps pay their business taxes on their individual income tax returns, not a corporate return.
Assessing the $624 billion tax increase on high-income taxpayers in Obama’s 2011 budget, Tax Foundation economists estimated that 39 percent – or $246 billion – would come from business income.
In 2007, there were 30.1 million private businesses (sole proprietors, S-corporations, LLCs, and partnerships), nearly three times as many as there were in 1980.
The table below illustrates the distribution of business income for taxpayers filing at each marginal tax rateThe marginal tax rate is the amount of additional tax paid for every additional dollar earned as income. The average tax rate is the total tax paid divided by total income earned. A 10 percent marginal tax rate means that 10 cents of every next dollar earned would be taken as tax. if the top rates were to increase to 36 and 39.6 percent. Clearly, those in the top brackets will bear the brunt of the higher taxes.
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Table 1: Distribution of Business Income by Statutory Marginal Tax Rate, 2011 |
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|
Statutory Marginal Income Tax Rate |
Number of Tax Units Reporting Business Income (Thousands) |
Percent of Total Reporting Business Income |
Percent of Bracket Reporting Busines Income |
Amount of Positive Business Income (Billions) |
Percent of Total |
|
Non-filers |
981 |
2.7 |
4.9 |
$ 3.1 |
0.3 |
|
0 |
9,201 |
25.5 |
31.4 |
$ 59.5 |
6.2 |
|
10 |
4,951 |
13.7 |
19.9 |
$ 45.9 |
4.8 |
|
15 |
10,777 |
29.9 |
21.7 |
$ 113.1 |
11.8 |
|
25 |
6,180 |
17.2 |
26.2 |
$ 114.2 |
11.9 |
|
26 (AMT) |
932 |
2.6 |
46.8 |
$ 37.5 |
3.9 |
|
28 (Regular) |
1,082 |
3.0 |
36.4 |
$ 48.6 |
5.0 |
|
28 (AMT) |
1,028 |
2.9 |
59.7 |
$ 113.5 |
11.8 |
|
36 |
272 |
0.8 |
65.7 |
$ 39.0 |
4.0 |
|
39.6 |
622 |
1.7 |
74.2 |
$ 388.2 |
40.3 |
|
All |
36,026 |
100.0 |
23.2 |
$ 962.5 |
100.0 |
|
Source: Urban-Brookings Tax Policy Center Microsimulation Model (version 0509-5). |
[1] Scott A. Hodge, “Over One-Third of New Tax Revenue Would Come from Business Income if High-Income Personal Tax Cuts Expire,” Tax Foundation Special Report No. 185, September 2010. http://www.taxfoundation.org/files/sr185.pdf
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