Obama Plan Means Higher Taxes on Business Profits: Study

President Barack Obama’s plan to raise tax rates for the top 2 percent of U.S. households would mean higher taxes on the people who report 53 percent of business income reported on individual returns, according to the Joint Committee on Taxation.

The nonpartisan analysts prepared the data at the request of Republicans on the Senate Finance Committee. Orrin Hatch of Utah, the panel’s top Republican, said the document was “irrefutable proof” that tax rates shouldn’t go up.

“With our economy as weak as it is, it makes absolutely no sense to hit more and more small businesses with a tax hike,” he said in a statement.

The analysis doesn’t include data on the size of the businesses owned by top earners or estimates of how they would respond to higher tax rates. It doesn’t consider the corporate income tax or taxpayers subject to the alternative minimum tax.

If Congress doesn’t act, tax rates for income, capital gains, dividends and estates will increase in 2013. Obama wants to let existing tax cuts expire for married couples making more than $250,000 a year and individuals making more than $200,000.

According to JCT, next year 940,000 households within the top 2 percent will report net positive business income and will face marginal tax rates that would be 36 percent or 39.6 percent under Obama’s plan, up from 33 percent and 35 percent now. That represents 3.5 percent of taxpayers who have business income and 53 percent of net positive business income, the analysis said.

Private Equity

Profits from businesses structured as partnerships, sole proprietorships and closely held corporations flow through to their owners’ tax returns. Democrats often note that many of these businesses -- including private equity firms and global law firms -- aren’t small.

Republicans and Democrats have been sparring for years over how much of the impact of marginal tax rate changes on high earners affect small businesses, with each side brandishing its own set of statistics.

A Treasury Department study last year that attempted to separate small businesses from larger business with income flowing through to their owners found that between 29 percent and 33 percent of small-business income was in the top two brackets.

“Republicans clearly don’t think that the very highest earners should be asked to pay more to help with the deficit,” Representative Sander Levin of Michigan, the top Democrat on the House Ways and Means Committee, said in an e-mailed statement. “Deficit reduction should not stop at the doorstep of millionaires.”

To contact the reporter on this story: Richard Rubin in Washington at rrubin12@bloomberg.net

To contact the editor responsible for this story: Jodi Schneider at jschneider50@bloomberg.net

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