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

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Download Special Report No. 185

Special Report No. 185

Key Findings

• The frequently cited statistic that only 2 or 3 percent of 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. 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 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 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.

• 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.