Income Tax Cuts And Small Business
The Joint Economic Committee in Congress released an important analysis on May 6 entitled “How the Top Individual Income Tax Rate Affects Small Business.” Among the report’s findings were:
• “Taxpayers in the highest income bracket are often entrepreneurs and small business owners, not just highly-paid executives or people living off their investments. Small business owners typically report their profits on their individual income tax returns, so the individual income tax is effectively the small business tax.”
• “Small businesses generally pay their income taxes through the individual income tax systems, not the corporate tax system. Sole proprietorships, partnerships, and S Corporations are the three main organizational forms chosen by small business owners.”
• “Of the 750,000 tax filers that would benefit from a reduction in the highest marginal tax rate, more than two-thirds (over 500,000 filers) have some small business income from a sole proprietorship, partnership, or S Corporation. These small business owners would receive 79 percent of the $13.3 billion in tax savings from reducing the top marginal tax rate to 35 percent in 2003 instead of 2006.”
• “Economists who have studied the effects of taxes on sole proprietorships have found that high marginal tax rates discourage entrepreneurs from investing in new capital equipment and, conversely, that reducing taxes encourages new investment.”
• “At higher marginal tax rates, hiring employees can become a less attractive proposition as a higher fraction of any additional income that a new hire might generate for the business is taxed and diverted to the federal government.”
• “Investment also promotes small business growth, since how much a worker can produce for a company depends on the amount and quality of the equipment that the worker has to work with. That is why when low marginal tax rates spur a business to make new capital investments in software, computers, or machinery, for example, that company’s workers become more productive, causing the company to grow. One study has shown that when the marginal tax rate for small businesses is reduced by 10 percent, those businesses’ gross receipts increase by over 8 percent.”
