Income Taxes and Small Businesses

Does increasing the marginal income tax rate on high income Americans create a crushing burden on small businesses? The Obama administration, evidently possessed of a high degree of confidence in the fundamental wonkiness of the American people, included this in the latest Treasury Department chartpack to try to convince us that it doesn’t.

This issue is, I think, actually better explained by words than with charts. Lots of people, especially rich people, have some “small business income.” But if you examine only the small businesses that actually have employees it turns out that people in the top two tax brackets report just $113 billion in small business income deriving from businesses with employees. That’s out of $1.2 trillion in total income of people in the top two tax brackets. In other words, only a tiny share of the revenue raised by higher taxes on the top two brackets constitutes taxation of income derived from operating real businesses that people work at.

I’ve always thought this whole small business issue is a bit of a red herring—whether someone is a highly paid lawyer at a large law firm or the highly paid proprietor of a tiny law firm seems irrelevant to the merits of imposing a higher tax rate on him—but these are some factoids to chew over if you think I’m wrong about that.