President Targets S Corps
President Obama announced yesterday his continued support for raising tax rates on Americans earning more than $250,000 ($200,000 for single filers). As the Wall Street Journal reported today, these policies would hit a large number of business owners:
Congress’s Joint Tax Committee—not a conservative outfit—estimates that in 2013 about 940,000 taxpayers will have enough business income to meet Mr. Obama’s tax increase threshold. And of the roughly $1.3 trillion in net business income, about 53% will get hit with the higher tax rates.
New numbers from Ernst & Young reinforce the impact these higher rates will have on S corporations and other pass-through businesses. According to Ernst & Young, business owners paying the top two rates earn:
- 72 percent of all S corporation income;
- 61 percent of all partnership income; and
- 13 percent of all sole proprietorship income.
As you can see, S corporations are more at risk of a tax hike than other pass-through businesses. Moreover, the numbers show that the more formal business structures — partnerships and S corporations — are more likely to have incomes exceeding $250,000 than the less formal sole proprietorships. More than half the business income at risk is earned by S corporation shareholders.
(Just as a reminder, the Congressional Research Service found the top five industries represented by large S corporations were manufacturing, retail and wholesale, mining, transportation, and construction. Those are the industries at risk here.)
And this doesn’t account for the 1.2 million business owners who make more than the President’s threshold but pay the AMT instead. They too will be paying higher taxes though thanks to the President’s health care law and the new 3.8 percent tax on investment income.
S corporations employ one out of every four private sector workers. All pass-through businesses — including S corporations, partnerships, and sole proprietorships — employ one out of two. The President would raise taxes on most of their income.
We knew raising taxes on employers during a period of high unemployment was particularly dangerous. Now we have a better idea of just how dangerous.