About half of small business income to be hit with higher taxes …

Punch line: Obama’s plan to raise top marginal rates is holding back the very people who should be leading the economic recovery.

Ken’s Q: Why doesn’t Obama just declare that a separate rate will apply to business income reported on 1040s?  That would neutralize this issue.

* * * * *

According to the WSJ …

The President has called for the permanent extension of the Bush tax cuts for singles with incomes below $200,000 and married couples with incomes below $250,000, but has proposed that most of the tax cuts for households with higher incomes be allowed to expire.

To buttress this position, the president and his supporters have repeatedly asserted that the expiration of these cuts will have little impact, because they affect only about 3% of the wealthiest Americans, people who “can afford it.”

House Speaker Nancy Pelosi repeatedly flips the number around and says that the planned tax increases would exempt “98% of American families and about 97% of small businesses.”

The 3% figure, which is computed from IRS data, is based on simply counting the number of returns with any pass-through business income. 

But, according to IRS data, fully 48% of the net income of sole proprietorships, partnerships, and S corporations reported on tax returns went to households with incomes above $200,000 in 2007.

That’s the number to look at, not the 3%.

And, the evidence is clear that lifting the top rates will hamper the business investment upon which our nation’s prosperity depends.

Research studies have consistently found that increasing progressivity of the tax code discourages entrepreneurs from starting new businesses.

Excerpted from WSJ: The Small Business The 97% Fallacy, Sept. 3, 2010

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