NCPA - National Center for Policy Analysis

IRS Data Shows that Businesses Will Bear Brunt of Obama's Tax Hike

July 30, 2012

President Obama renewed his call for allowing the Bush-era tax rates to expire for families earning over $250,000 while extending the lower rates for taxpayers below that threshold. The president and his economic team tend to dismiss the impact that such as tax hike will have on business activity because only 2 or 3 percent of taxpayers with business income are taxed at the highest rates, says Scott A. Hodge, president of the Tax Foundation.

However, absent from these calculations (and crucial nonetheless) are the effects of such taxes on pass-through businesses that are responsible for substantial amounts of employment. Set up such that profits are taxed as individual income for the firm's owners, pass-through businesses would see a severe tax hike under President Obama's current plan.

  • The vast majority (66 percent) of pass-through business income in 2009 was reported by taxpayers earning more than $250,000.
  • Thus, this income would be subject to raised rates on the two highest income tax brackets (33 percent and 35 percent).
  • A recent Treasury report analyzed IRS data from 2007 and found that roughly 4.2 million pass-through business returns -- out of 34.7 million overall -- were employers.
  • Thus, a substantial portion of these pass-through businesses, which will see higher taxes under President Obama, are employers who will have to make tough hiring decisions as a result of the tax hike.

No matter how you cut the data, the fact is that hiking the top individual income tax rates would amount to one of the largest single tax increases on individually owned businesses in modern history and a threat to the long-term economic health of the nation.

Source: Scott A. Hodge, "IRS Data Shows that Businesses Will Bear Brunt of Obama's Tax Hike," Tax Foundation, July 9, 2012.

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