Small business owners are responsible for creating the vast number of jobs in America but their average income of just over $100,000 falls far below any proposal to increase the top marginal tax rate on incomes over $500,000. Contrary to high pitched rhetoric, increasing the top marginal individual income tax rate will not adversely impact small business owners.
“Increasing the top marginal tax rate on incomes over $ 500,000 would have a negative economic impact because it would be a disincentive for “job creators” by reducing funds that could be used to create jobs.” While this statement is often a favorite sound bite heard in the media it is based on a completely false premise that small business owners make more than $500,000 in personal income.
To understand why this is an absurd premise let me begin by making an assumptions of my own. Since we’re talking about small businesses and personal income let’s limit the discussion to S- Corporations where the profits of the business are reported as personal income of the shareholders, e.g. the small business owners. Not all small businesses are S-Corporations. Some are C-Corporations that pay their executives salaries, their shareholder dividends and pay a corporate income tax. C-Corporations have their own extensive tools to limit tax liability.
The first problem with the “harm the job creators” argument is that regardless of the tax structure of the small business (S-Corp versus C-Corp), the overarching business strategy is to minimize the tax burden by reinvesting in the company to benefit from the corresponding deductions. For example, no small business owner is going to buy a car with personal income from their business when they can let the corporation purchase the car and deduct it as a legitimate business expense. By the time a small business owner reports a personal income of over $500,000 you can be assured they have already invested every possible penny in their business in an attempt to minimize their personal income tax burden.
The second problem for those arguing that increasing the top marginal tax rate on incomes over $500,000 is that there are very few job creators that would be affected. S –Corporation income is reported on IRS form 1120-S. The IRS provides a summary of 1020-S filings that can be used to estimate the S-Corporation income per business and per shareholder. Using the 2008 data, there was 4.74 trillion dollars of revenue reported on 1120-S forms and $4.38 trillion dollars in deductions. The total net income reported was 432 billion dollars for 4.2 million shareholders. Based on these numbers, the average income per shareholder would be $102,888. This income level would be unaffected by increasing the top marginal rate on incomes over $500,000.
SOI Tax Stats – Table 2 – Returns with Net Income, Form 1120S (2008)
| Number of returns |
2,493,706 |
| Number of shareholders |
4,200,809 |
| Total receipts [33] |
$ 4,742,936,458,000 |
| Total deductions |
$ 4,388,363,307,000 |
| Net income (less deficit) from a trade or business [33] |
$ 352,780,848,000 |
| Portfolio income (less deficit) distributed to shareholders [34] |
$ 67,829,940,000 |
| Real estate rental net income (less deficit) |
$ 10,331,315,000 |
| Net income (less deficit) from other rental activity |
$ 1,271,444,000 |
| Total net income (less deficit) |
$ 432,213,546,000 |
| Average per return (Total net income/Number of returns) |
$ 173,321 |
| Average per shareholder (Total net income/Number of shareholders) |
$ 102,888 |
Confronting Mediocrity 