BTC BRIEF: Small Ball for Small Business - Ending High-End Bush Tax Cuts Likely to Have Little Effect on Small Business Job Creators

By Allan Freyer, Policy Analyst
Budget & Tax Center
December 2012

KEY FINDINGS

  • Allowing the 2001 and 2003 tax cuts on incomes above $250,000 to expire in 2013—changing the top marginal tax rate from 36 percent to 39.6 percent—would affect only a small percentage of small businesses, and those that would be affected would face minimal barriers to capital reinvestment and jobs creation as a result.
  • These tax changes only apply to small businesses that file through the personal income tax code and have no impact on those that pay corporate income tax, so many of North Carolina’s largest businesses—and employers—would not be affected.
  • According to the U.S. Department of Treasury, only 2.5 percent of the small-business owners that file through the federal personal income tax code have incomes—i.e., after making capital investments and meeting payroll—in excess of $250,000 per year and would be affected. These small business owners would still receive tax cuts on the portion of their incomes below that threshold.
  • Only a quarter of total small-business income would be affected by this tax change, because 74 percent of the nation’s small-business income is earned either by filers who bring home less than $250,000 in income or by entities that are not small businesses as traditionally understood (e.g., law firms, partnerships, and rental properties). Only 7.9 percent of filers with small-business income have any employees.
  • Minimal changes in the top marginal rate will have limited effect on the investment decisions of these small businesses because their effective tax—the level of taxation after taking into account various deductions and credits—is already low, due to various existing small business write-offs related to equipment, capital loss, and perhaps most critically, payroll.
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