Fiscal Fact No. 180
Business income may be in for a significant 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. hike in 2011. The Ways and Means CommitteeThe Committee on Ways and Means, more commonly referred to as the House Ways and Means Committee, is one of 29 U.S. House of Representative committees and is the chief tax-writing committee in the U.S. The House Ways and Means Committee has jurisdiction over all bills relating to taxes and other revenue generation, as well as spending programs like Social Security, Medicare, and unemployment insurance, among others. has approved a new 5.4 percent surtax on income over $1 million and two smaller surtaxes on other high-income people. These may become law at the same time as the current top tax rate on wages (35%) reverts to 39.6% (end of 2010).
In most nations 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 dominate the business sector, and so these higher wage taxes would not have a dramatic effect on “business income.” But the U.S. business sector includes millions of so-called non-corporate businesses organized as limited liability partnerships (LLPs), limited liability corporations (LLCs), S-corporations, and other forms. These American businesses pay their taxes on the individual tax returns of the owners. One argument, then, against raising personal income tax rates is that businesses will suffer.
The IRS is careful not to publish so much detail about the nation’s individual tax returns that personal privacy could be breached, and this is especially true of high-income tax returns. Therefore, it is impossible to determine precisely whether a tax return with “business income” is actually a struggling or emerging business. However, to the extent we can analyze personal income tax returns to clarify the danger of high rates to “business income,” we do so here.
Many seemingly contradictory statistics are cited on this issue, depending on the author’s opinion of higher tax rates. If an author favors higher tax rates, he is likely to cite a statistic similar to this: only 4.8% of all tax returns with business income will face a tax increase. That’s true because so many mom-and-pop businesses do not earn enough to pay the coming tax rates on high income.
If worried about the economic damage of higher tax rates (which we are), an author will cite this statistic: 62.6% of all business income is earned by tax returns facing a tax increase. That’s true because those 4.8% of businesses that make enough to pay the new tax rates are large and profitable, and taxes on them hit much more income, potentially hurting many more workers.
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Here are some other statistics on business income. In each case, we are measuring the combined effect of a new 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. and the reversion of the top two tax rates to 36% and 39.6%.
- 70.1% of returns facing a tax increase have some form of business income.
- 26.0% of all income earned by those returns facing a tax increase is business income.
- 32.5% of all income earned by business returns facing a tax increase is business income.
- The total tax increase on business income would be $51.3 billion, a 24.5% increase, assuming business income is the last dollar of income earned.
- 36.7% of the total tax increase is attributable to tax increases on business income, assuming business income is the last dollar of income earned.
- The average return with business income would face a total tax increase of $3,246.
- The average return facing a tax increase would face a total tax increase of $54,716.
- The average return with business income that is facing a tax increase would face a total tax increase of $66,979.
- The average return with business income would face a tax increase on business income of $1,388.
- The average return facing a tax increase would see a tax increase on business income of $20,752.
- The average return with business income that is facing a tax increase would see a tax increase on business income of $29,595.
- The total average tax rateThe average tax rate is the total tax paid divided by taxable income. While marginal tax rates show the amount of tax paid on the next dollar earned, average tax rates show the overall share of income paid in taxes. on business income would increase from 23.7% to 29.5%, assuming business income is the last dollar of income earned.
Table 1
The Average Impact of Proposed Tax Increases (Health Surtax plus Expiring Bush Tax Cuts) on the Business Income of High-Income Tax Returns
Estimates for Tax Year 2011
|
Statistical Category |
Returns with Business Income |
All Returns |
||
|
Business Returns with Tax Increase |
All Business Returns |
Returns with Tax Increase |
All Returns |
|
|
Number of Returns |
1,789,459 |
36,921,366 |
2,551,973 |
141,226,026 |
|
Average AGI |
$948,414 |
$107,340 |
$832,104 |
$64,469 |
|
Average Business Income |
$308,368 |
$23,893 |
$216,229 |
$6,246 |
|
Average Total Tax (Baseline) |
$226,395 |
$16,601 |
$198,035 |
$7,468 |
|
Average Total Tax |
$293,373 |
$19,847 |
$252,752 |
$8,457 |
|
Average Tax on Business Income (Baseline) |
$92,185 |
$5,667 |
$64,641 |
$1,481 |
|
Average Tax on Business Income (Policy) |
$121,781 |
$7,055 |
$85,393 |
$1,844 |
Note: Business income is defined as Schedule C income plus Schedule F income plus Schedule E income less income from royalties, trusts and estates. Any tax return with schedule C ~= 0, schedule E income less royalties, trusts and estates ~= 0 or schedule F income ~= 0 is defined as having business income. To calculate average tax on business income, we assume that all business income is the last dollar of income earned on a tax return.
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