US Businesses Income Set To Take Double Tax Hit

by Mike Godfrey, Tax-News.com, Washington

30 July 2009

The total average tax rate on business income in the US would rise by almost 6% as a result of tax plans currently under consideration by Congress and the Obama administration, according to a new report.

The Tax Foundation, a non-partisan fiscal policy think tank, has calculated that the proposed health surtaxes approved by the House Ways and Means Committee, combined with the reversion of the top federal tax rate on wages to 39.6% at the end of next year would mean "a significant tax hike" on business income in 2011.

The report said that the total average tax rate on business income would increase from 23.7% to 29.5%, assuming business income is the last dollar of income earned.

"The US business sector includes millions of 'non-corporate' businesses that pay their taxes on the individual income tax returns of their owners," Tax Foundation President Scott Hodge said. "That means new tax hikes on personal income, which may soon bring total rates over 50% in most states, will be hurting small businesses. Some pundits like to cite the statistic that only 4% of the 36 million tax returns with 'business' income are subject to the surtax, but that 4% of tax returns earns 60% of the USD882bn in total 'business' income."

The report takes into account the three-tiered health care surtax, the proposed increase in the top two tax rate on wages to 36% and 39.6% and the expiration of other tax cuts passed under President George W. Bush and concludes that: one-third of the USD49bn raised by the surtax in 2011 is from business income; 70.1% of returns facing a tax increase have some form of business income; and over one-quarter (26%) of all income earned by those returns facing a tax increase is business income.

The report finds that the total tax increase on business income would be USD51.3bn, a 24.5% increase, assuming business income is the last dollar of income earned. The average return with business income would face a total tax increase of USD3,246, while the average return with business income that is facing a tax increase would face a total tax increase of USD66,979.

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