July 17, 2009

Business Income Would Take Double Hit from New Surtax, Expiring Tax Cuts

63% of All Business Income is Earned by Tax Returns Facing a Tax Increase

Washington, DC, July 17, 2009 - Proposed health care surtaxes approved by the House Ways and Means Committee, combined with the reversion of the top federal tax rate on wages to 39.6% at the end of next year would mean "a significant tax hike" on business income in 2011, according to a Tax Foundation report.

"The U.S. business sector includes millions of 'non-corporate' businesses that pay their taxes on the individual income tax returns of their owners," Tax Foundation President Scott Hodge said. "That means new tax hikes on personal income, which may soon bring total rates over 50% in most states, will be hurting small businesses. Some pundits like to cite the statistic that only 4% of the 36 million tax returns with 'business' income are subject to the surtax, but that 4% of tax returns earns 60% of the $882 billion in total 'business' income."

In Tax Foundation Fiscal Fact No. 180, "New Surtax and Expiring Tax Cuts Could Hit Business Income Simultaneously," Hodge examines the damaging effects of high individual income tax rates on business income. The Fiscal Fact is available online at http://www.taxfoundation.org/publications/show/24887.html.

The report takes into account the three-tiered health care surtax—1 percent on married couples with adjusted gross incomes (AGI) between $350,000 and $500,000 (singles between $280,000 and $400,000); 1.5 percent on couples with incomes between $500,000 and $1 million (singles earning between $400,000and $800,000); and 5.4 percent on couples earning more than $1 million (singles beyond $800,000)—along with reversion of the top two tax rate on wages to 36% and 39.6% and other Bush tax cuts. Among the findings:

• One-third of the $49 billion raised by the surtax in 2011 is from business income
• 70.1% of returns facing a tax increase have some form of business income
• 26.0% of all income earned by those returns facing a tax increase is business income
• The total tax increase on business income would be $51.3 billion, a 24.5% increase, assuming business income is the last dollar of income earned
• 36.7% of the total tax increase is attributable to tax increases on business income, assuming business income is the last dollar of income earned
• The average return with business income would face a total tax increase of $3,246
• The average return with business income that is facing a tax increase would face a total tax increase of $66,979
• The total average tax rate on business income would increase from 23.7% to 29.5%, assuming business income is the last dollar of income earned

The Tax Foundation is a nonpartisan, nonprofit organization that has monitored fiscal policy at the federal, state and local levels since 1937.

###

Fiscal Fact No. 180 can be found at http://www.taxfoundation.org/publications/show/24887.html. To schedule an interview, please contact Tax Foundation Manager of Media Relations Natasha Altamirano at (202) 464-5102 or naltamirano@taxfoundation.org.