Most new jobs are created by small businesses and President Obama claims his proposed 2011 federal budget is designed to be especially helpful to entrepreuners and Main Street companies that drive economic growth.
But an analysis by Americans for Tax Reform (ATR) highlights some major problems with the Obama budget for small business, beginning with the fact the president’s proposal hikes taxes on virtually all of them. The reason for this is the fact that most small business men and women pay taxes as individuals, not on a corporate tax return.
The top two tax brackets under Obama are going up, as he and the Democratic majority in Congress allow the Bush tax cuts to expire, from 33 percent to 35 percent and from 36 percent to 39.5 percent.
ATR also points out that “small business owners also have to pay the Medicare portion of the self-employment tax at the high margin. Furthermore, they will face a phaseout of their itemized deductions (Pease) and personal exemptions (PEP) under the Obama budget, unlike 2010 law.”
Put it all together and the picture that emerges looks like this, according to ATR(Based on an assumed state income tax rate of 5 percent, the following is for a sole proprietor or general partner. Note that S-corporation owners don’t have to pay Medicare tax, so the bottomline will be slightly smaller for them):
Tax Rate:
Federal Income
39.6%
State Income:
5.0%
Self Employment:
2.9%
SE Deduction:
(0.65%)
PEP and Pease:
2.34%
Total
49.19%”
The top marginal tax rate today is about 41 percent, so the Obama budget, if enacted as proposed, would result in an increase of slightly more than 8 percentage points.
If the goal is to generate new economic growth that will lower the unemployment rate among existing jobs and create millions of new jobs in an expanding economy, the direction for taxation of small business ought to be down by 8+ percent, not up by that amount.
There are a few positives for small business in the Obama budget proposal. For more, ATR’s Michelle Fields has the details.
