Taxpayer Protection Pledge
ATR's Congressional Ratings
An American Agenda: Vote for Your Priorities
Invite Grover Norquist to Speak at Your School or Event
INDEX

The Obama Budget and Small Business

From Ryan Ellis on Tuesday, February 2, 2010 4:32 PM
Add to Reddit Add to Stumbleupon Add to Delicious Add to Digg Add to Facebook Add to Twitter

President Obama today is touting all the advantages his budget has for small businesses.  In particular, he's talking about using TARP funding (supposedly temporary, to be paid back to taxpayers) for small business lending.

Even if you limit yourself to the tax side of things, though, there are some pro-small business crumbs in the Obama budget: small business expensing is extended, a new jobs credit is created, and small business stock is exempted from capital gains.  Good things, all, to one degree or another.

But there is one bad--very bad--tax increase on the small business sector in the Obama budget.  Under his plan, the top two income tax rates increase from 33 and 35 percent to 36 and 39.6 percent.  We've documented before that two-thirds of small business profits pay taxes in these bracket levels.  Small businesses pass their profits through to their owners, who pay income tax on them.  To raise taxes on "the rich" is a laser-beam tax hike aimed at small employers.

Small business owners also have to pay the Medicare portion of the self-employment tax at the high margin.  Furthermore, they will face a phaseout of their itemized deductions (Pease) and personal exemptions (PEP) under the Obama budget, unlike 2010 law.

What does that mean for the marginal tax rate on small business activity?  Assuming a 5 percent state income tax rate, the calculation is the following for a sole proprietor or general partner (S-corporation owners don't have to pay Medicare tax, so it will be slightly smaller for them):

Tax Rate
Federal Income 39.6%
State Income 5.0%
Self Employment 2.9%
SE Deduction (0.65%)
PEP and Pease 2.34%
Total 49.19%

So, the top marginal tax rate on small business income will rise to 49.19 percent by my reckoning, up from about 41 percent today.  This is a huge increase in the tax rate on most small business profits.  I wonder if President Obama will be sharing this with entrepreneurs today?

Permalink | Email | Print | Tags: TAXES, OBAMA, BUDGET

Related Articles

How the FCC Plans to Tax the Internet - Tuesday, March 16, 2010 3:42 PM

ATRF Analysis: The Importance of International Tax Competition - Monday, March 15, 2010 11:24 AM

How Tax Preparation "Simplification" Will Lead to Tax Hikes - Monday, March 15, 2010 11:04 AM

China Buys Our Debt, We Give Them Renewable Energy Stimulus Jobs...Seems About Right - Friday, March 12, 2010 4:24 PM

Urge Gov. McDonnell to Privatize Tax Preparation and Filing - Friday, March 12, 2010 4:20 PM

Comments

It's obvious that the president, as well as many others, don't appreciate how measures ostensibly aimed at seizing wealth from the so-called "super-rich" actually have far-reaching repercussions - including, as this points out, on small businesses.
>> Phil Tuesday, February 2, 2010 4:48 PM

what are the current corporate taxes and dont these also affect these small businesses?
>> Clint Tuesday, February 2, 2010 5:21 PM

The corporate income tax rate is currently 35 percent. Most small businesses are not "C-corporations." Mostly, the CIT is paid by large businesses. This is also a very destructive tax to our economy.
>> Rellis Tuesday, February 2, 2010 6:25 PM

Add a Comment


CAPTCHA Image
Add me to the ATR Newsletter list (If you are already on the list, you will not be subscribed a second time.)
Notify me when others comment on this article.