Could Raising Taxes Hurt Only 2-3% of Small Businesses?

May 17, 2011 | By: TaxCure Staff

tax increases on small businessAs small business owners continue to struggle alongside consumers through this economic recovery, many are concerned about proposed tax changes.

President Obama has proposed several changes which impact high-income families. The theory is that those who earn more money should carry a higher tax burden when compared to those with lower income.

These changes have the potential to affect many small business owners who report business income based on individual earnings. Sole proprietors, limited liability companies and S-corporations do not report business income on a corporate tax return but rather an individual income tax return.

A recent article appearing on states: “The frequently cited statistic that raising the top tax rates would ‘only’ impact 2 or 3 percent of tax returns is misleading. Those 2 or 3 percent represent the most profitable and growing ‘flow-through’ businesses that are key to economic recovery.”

Proposed tax changes might eliminate many of the tax breaks enjoyed by small business owners while increasing the tax burden. This is according to a study by Robert Carroll and Gerald Prante of Ernst & Young. The study also predicts: “small-business employers would be facing ‘sharply higher rates on a significantly broader base of income’ if Congress passed a corporate-only tax reform. The paper figures that small businesses could see their tax burden rise by about 8% per year, or $27 billion, under a tax overhaul that affects only taxable corporations.”

Small businesses play a huge role in our economy. Despite the large amounts of money and jobs provided by large corporations, it is the small business owners who are contributing significantly to the economy. Over half of the jobs in the private sector are provided by small businesses or pass-through businesses. These companies not only support the small business owner and their families but also the families of their employees. An additional tax burden placed on small businesses could make it more difficult for many to remain operational.

Raising taxes on high-income earners may help reduce the deficit but only if those high earners continue to make money. If small business owners find themselves unable to conduct business efficiently and hire due to excessive regulations and taxes, the result could be devastating to our economy.

Not all small business owners agree that changes in tax laws would have negative consequences. The Wall Street Journal published an online article stating: “A plan released…by House Budget Committee Chairman Paul Ryan (R., Wis.) would make permanent the income-tax cuts approved under President George W. Bush, close loopholes and lower tax rates, among other moves. This would potentially benefit small business since many entrepreneurs pay taxes for their establishments at the individual level. The National Federation for Independent Business, a trade group in Washington, estimates that 75% of small-business owners fall into this category.”

Another change that may benefit small business owners is the ability to “expense 100% of most of their investments in 2011,” in addition to the proposed payroll tax reductions.