Cliff Notes II
With less than 200 days left before Washington leads the economy over the fiscal cliff, the Joint Committee on Taxation (JCT) has offered up more evidence that Congress needs to act to extend the current tax rates for everyone, including those business owners with higher incomes. As Bloomberg reports:
President Barack Obama’s plan to raise tax rates for the top 2 percent of U.S. households would mean higher taxes on the people who report 53 percent of business income reported on individual returns, according to the Joint Committee on Taxation.
According to the JCT, in 2013 nearly 1 million business owners (940,000) will have incomes that put them into the top two tax rates — 36 or 39.6 percent. Perhaps more significantly, this policy would raise marginal rates on more than half of all pass-through business income (53 percent). When you couple this finding with the fact that more than half of all business income is earned by pass-through businesses, the bottom line is that proposals to raise taxes on upper income taxpayers would hike rates on more than one quarter of all business activity in the United States.
Senate Finance Committee Ranking Member Orrin Hatch (R-UT) requested the analysis and observed:
This independent analysis is further irrefutable proof of why we simply cannot allow the President to have his way by raising taxes on small business. With our economy as weak as it is, it makes absolutely no sense to hit more and more small businesses with a tax hike.
Proponents of raising taxes point to the relatively small percentage of taxpayers affected (3.5 percent) and argue that it won’t hurt the economy. But raising marginal tax rates on that much economic activity is bound to meaningfully reduce investment and job creation.
Moreover, the size of the tax hike is daunting. The highest marginal federal tax rate today is 35 percent. Starting next January, the top rate rises to 44.7 percent! That’s the 39.6 percent rate, plus the 3.8 percent surtax from the Affordable Care Act, plus another 1.3 percent from the return of the Pease phase-out. Put another way, a business whose shareholders pay the top marginal rate would see the after-tax return on a dollar of its income drop from 65 cents to just over 55 cents– a decrease of 15 percent.
As we’ve said before, this debate is the difference between focusing on who’s being taxed and what’s being taxed. In this case, what’s being taxed is a very large percentage of overall business activity in the country. In our view, this is the more compelling perspective. Considering the weak job creation numbers recently, the economy seems to agree.