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Which businesses would pay more income tax?

When discussing the impact of letting some of President Bush's tax cuts elapse, the Obama administration and its critics in the GOP focus on different aspects of the same data. President Obama's side argues that allowing the tax breaks to expire for individuals with incomes over $200,000 and couples with incomes over $250,000 would affect a tiny percentage of small businesses; Republican critics (such as Rep. Eric Cantor of Virginia in Monday's Wall Street Journal)  say it would hit about half the income earned by those firms.

They're both right, kinda sorta, as this table  by the nonpartisan Tax Policy Center shows. The center's model, which uses IRS data on business income that's reported on personal tax returns, projects that 3.6% of all filers with any positive net business income would report enough to reach the top two tax brackets. Remember, that's not a percentage of all small-business people; it's a percentage of a percentage. The center projects that less than 1% of all filers  would report enough income to be affected by an increase in the top two marginal rates.

At the same time, the center notes that just under 45% of all of the positive business income was reported by filers who would be subject to the new 36% and 39.6% rates. So increasing the two highest marginal rates would carve off quite a bit of net business income.

But what kinds of businesses would be affected?

Looking more closely at the center's numbers, it's clear that the bulk of the impact is on partnerships and subchapter S corporations,  not the mom-and-pop small businesses that typically report their earnings on Schedule C. Consider the following graphs, all derived from the center's data:

Schedule C chart This one pertains to Schedule C filers with net positive revenue. The blue bars show the percentage of filers projected to reach each tax bracket -- for example, a little more than 15% would go no higher than the 10% bracket, and a little less than 30% reach the 15% bracket. The red bars show  how much of the net positive Schedule C revenue the filers in each bracket reported. The two bars aren't equal, but they're roughly symmetrical.



Schedule E chart This chart deals with Schedule E filers, or partnerships, that report net positive revenue. The blue bars show the percentage of those filers in each tax bracket. The red bars show the percentage of Schedule E revenue that those filers reported. Compared to Schedule C, a higher percentage of these filers reach the top two brackets, and those filers capture a much more disproportionate share of the revenue.



S Corp chartThis chart shows subchapter S filers. It's a more extreme version of the partnerships chart -- even more of the revenue is captured by the small percentage of businesses in the top tax bracket.

As the charts indicate, both sides in the debate have a point. The tax increase sought by Obama wouldn't touch most businesses, but the ones it would touch are the most successful by far. It stands to reason the more profitable a business, the more likely it is to hire and help the country grow its way out of the current doldrums. A tax hike that eats into profits leaves less for companies to reinvest in themselves and expand. On the other hand, if you believe the country just can't afford the full cost of extending the Bush tax cuts,  the logical place to start is by rolling back the cuts enjoyed by those taking in the bulk of the profits.

-- Jon Healey

 

Comments () | Archives (18)

The comments to this entry are closed.

VonS

Like playing Badminton in slow motion. No winners, no losers, just a lot of racket.

Stryke

We don't need more taxes! What's needed is to wean our Government Gone Wild of its credit card mentality and obscenely wasteful squandering of tax dollars on wars and useless weapons systems and foreign aid bribes and massive institutions like the CIA, NSA, and on and on... all bloated, bloodsucking ticks on the backs of taxpayers!

Pinoy

Businesses and companies are leaving California; therefore jobs leave. The more difficult you make it to invest and prosper here the more they created elsewhere in other states and even other countries. At what point will the politicians and voters realize that you can only tax people so much that they don't feel it's worth it to invest here.

I read an article where Cisco was begging to loosen regulations so it doesn't have to outsource its business, but did anyone listen? ::crickets::

LA raised it's LADWP rates, it's trash fees, it's gas fees, property tax, and go after people who did not file for a business license( which costs money) and CA raised it's car registration fee. Now they're talking about an internet fee.

Do you really think people need more taxes?

FutureUser

A much more appropriate question would be, What percentage of the small businesses that have hired more workers in the last 3 years, will be negatively impacted by the tax increases? That gets directly to the issue, I believe.

Jon Healey

@FutureUser -- I have a guess as to the answer, but do you have some actual data?

Jim Beam

LIBERALISM IS A MENTAL DISORDER!

doug lem

What I don't understand is how a higher tax bracket on profits will cause a company to stop hiring or not invest. The last time i checked those were tax deductible anyway.

doug lem

It's interesting to me that people don't want to pay taxes, yet they want government services like war, police, fire, air traffic control, interest on debt, etc. It's really a question of how our government gets money. Our tax system is corrupted by big business and the special interests. I think everyone who lives in this country should pay taxes, including the poor and middle class and the wealthy who live off tax free munis and dividends and interest. I have little hope that our system will come up with something fair with all of the special interests controlling our laws.

Winston

When businesses leave, or collapse others will rise to fill the void, but under these economic circumstances, time to develop is not available to California, but on the other hand, this is not a California agenda, its a federal one, which means it spreads across the national board equally, the only escape is to move out of the country, so add incentives to companies that stay, remember the economy is all about perception.

R U Joking?!

"But what kinds of businesses would be affected? (from new taxes)"

You folks in the parallel universe of the LA Times really don't get it. Businesses don't pay taxes, their customers do. All taxes are paid from sales, with owners raising prices to cover any new taxes & maintain their minimum profit margin. If taxes go too high for customers to pay the new higher prices, then the businesses close.

This should be simple to see, but most PC lib's look at the economy as a cash cow to be milked, with no thought of where revenue is really generated or how to grow it. Worse, many Dem's see corporations as evil (!), evidence of their simplistic views, and prefer a strong gov't to stifle them & slow the economy.

I have never met a rational, self-made business person that wanted to give the money they earned to the gov't to fund wars, bureaucracy, waste, fraud, illegal aliens, welfare & more.

Marphurius Parione (Congresso_degli_Arguti)

Taxes are the heroin addiction of Democrats.

http://wiki.answers.com/Q/What_percentage_of_the_US_population_pays_the_most_taxes

The top 5% of earners pay 93% of all taxes

What percentage of us citzens do not pay taxes?
47%


You can call the EDD ( http://www.edd.ca.gov/ ) today to get the amounts owed for an employee making 100k/year.

$6900 - Income tax
$1100 - SDI tax
Total: $8000

You then add in all fed withholding - 28%
$28000
Social Security - 6.2%
$6200
Total tax on 100k - 42.2% or 42,200

We then pay property tax (4-8k on average, so we'll say 5k), sales tax, gas tax, airplane ticket tax, tax on utility usage (check your gas, electric, trash bill) assorted fees (car registration, parking meters, etc.)

Bottom line is we're paying roughly 50% of what we earn in taxes, or so called fees as they're known out here in LA.

Many people would say 100k is rich. Those folks need to pull their heads out.

But the fact is there are quite literally half of the legal population getting a free ride.

Now add in the illegal population getting a free ride:

http://www.latimes.com/news/local/la-me-illegal-welfare-20100906,0,3446997.story

Welfare payments to children of illegal immigrants in Los Angeles County increased in July to $52 million, prompting renewed calls from one county supervisor to rein in public benefits to such families.

The payments, made to illegal immigrants for their U.S. citizen children, included $30 million in food stamps and $22 million from the CalWorks welfare program, according to county figures released Friday by Supervisor Michael D. Antonovich.

The new figure represents an increase of $3.7 million from July 2009 and makes up 23% of all county welfare and food stamp assistance, according to county records.

Last year, welfare and food stamp issuances totaled nearly $570 million, and the amount is projected to exceed $600 million this year. In addition, county taxpayers spend $550 million in public safety — mostly for jail costs — and nearly $500 million for healthcare for illegal immigrants, Antonovich said.

"The supervisor is very concerned," said Antonovich spokesman Tony Bell. "He believes we have an economic catastrophe on our hands."

TEA. Taxed enough already. Enough. We're done. Socialism is great until you run out of other people's money to spend. And you may not have any more of mine, or anyone elses.

RichardM

@doug lem -- federal income taxes aren't deductible anywhere, they reduce the return on investment of the person that owns the business -- little return on investment means that the business does what is necessary to increase it -- lay off people for one.

Mtpoppa

How many of the "small businesses" are actually the patners share of law firm profits and how many of the s corporations are actually incorporated Doctors and other professionals? It is too bad the tax code is so complicated these numbers can not be reliably sorted out. I woul bet a god bit of "small business" income which will be taxed at the highest rate is, in fact, earnings of professionals reported in a different manner.

Geoff Trapp

Why has the LA Times filed this under the "opinion" section?

This is a matter of simple, true-or-false, knowable mathematical facts. I fail to see the "matter of opinion" in 1 + 1 = 2.

I would sure appreciate the facts listed in this report to be reported on the front page as news ... perhaps in response to the propaganda spun by both sides.

Jon Healey

@MP -- That 50%-don't-pay-taxes thing is a myth because it ignores sales taxes, excise taxes (e.g., the gas tax), payroll taxes and property taxes (which everyone pays, either directly or indirectly through their rent). It's true that a large percentage of households don't pay income taxes, but that's partly a consequence of a deliberate policy decision. The Bush tax cuts increased the amount of income not subject to taxation, which expanded the universe of households that don't owe the IRS anything. Another factor was the expansion of the earned income tax credit, which I *think* started with Clinton.

Marcos El Malo

@Jim Beam: Let me guess, you were named after you mom and dad's best friend. Do you have a brother named Johnny Walker or Night Train?

802mrbill

We don't have a revenue problem; we have a spending problem. You can't fill a bucket full of holes no matter how much money you pour into it.

Until we get that idea into the heads of our voters, nothing will change.

Neil Alexander Walker

Thank you for a fair report on the possible consequences of either version of future tax policy.


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