Small Business Benefited...
...From Upper Income Tax Rate Cuts
The two major party presidential candidates are split over taxes on upper income earners. A new report sheds important light on this debate.
President George W. Bush wants to protect and make permanent the broad tax relief measures passed in 2001 and 2003. Those tax cuts included reducing the top income tax rate on individuals from 39.6% to 35%. In contrast, Senator John Kerry wants to wipe out the 2001 and 2003 tax cuts for those earning more than $200,000.
The key fact missed by Kerry is that such a tax increase amounts to a tax increase on small business. Now, of course, no politicians wants to be caught hiking taxes on small business, so the emphasis is placed on taxing the “rich” or the “wealthy.” That is, it’s class warfare.
However, a new analysis released by the Tax Foundation on August 5 makes clear that the Kerry tax hikes would hurt small business.
Among the findings, the study, written by Tax Foundation president Scott Hodge and senior economist J. Scott Moody, points out that “an extraordinarily high proportion of high-income taxpayers have some form of business income and that as their incomes rise, so too does the likelihood that they have business activity.” It turns out that 74 percent of the top 1 percent of income earners have business activity. This groups breaks down as 68 percent of those with incomes between $317,000 and $499,999 have business activity; 77 percent between $500,000 and $999,999; and 83 percent with incomes of $1 million or more.
Business owners also carry the bulk of the personal income tax burden. The foundation estimates that in 2004, “business owners – specifically those with a positive tax liability – will pay 54.3 percent of all individual income taxes in 2004.” That includes 37.4 percent of all income tax revenues coming from business owners making more than $200,000, which translates into the top two percent of income earners and is the group targeted by Kerry. The analysis also notes that 69 percent of all income tax collections coming from businesses are paid by those earning more than $200,000.
Among high-income earners, 37 percent of income comes from salaries and wages, and 28 percent from business income. Some have argued that this business income level isn’t all that high, and therefore, that reductions in the highest individual income tax rates do not boost business. The authors of the study refute this argument, with their main point being that “it is unrealistic to think that business owners would rely solely on profit disbursements from their businesses to pay their families’ bills.” They continue: “Instead, they would pay themselves a healthy salary first, then pocket any residual profits at the end of the year, leaving them with a majority of their income in salaries and wages despite their business ownership.” This obviously is business income, and matters a great deal to the business.
When factoring in all sources, the Tax Foundation study notes that as much as 65 percent to 73 percent of total income for these business owners could be business income.
How do the authors summarize matters? They write: “The only conclusion from these findings is that lowering the top marginal income tax rates did indeed benefit many highly taxed business owners and the U.S. economy.”
In turn, raising taxes would hurt business owners and the economy. Make no mistake, John Kerry’s class warfare tax policy amounts to war being waged on small business.
Raymond J. Keating serves as chief economist for the Small Business Survival Committee.
