WV Center on Budget and Policy > Blog > Tax and Budget > Few Businesses Affected by Senate Tax Plan

Few Businesses Affected by Senate Tax Plan

Last week, the U.S. Senate passed legislation extending the Bush tax cuts for households with incomes below $250,000 ($200,000 for individuals). While the legislation won’t take effect without action from the U.S. House of Representatives, some folks are expressing concern that by allowing the top tax rate cut to expire many small business would be affected and that this would hurt the economy. This is because many small business owners pay individual income taxes.

But in fact, only a small number of business would be affected. According to the Treasury Department, only 2.5 percent of small business owners face the top two tax rates, meaning that nearly all small businesses would be unaffected by the expiration of the top rate.
 
The same is true for West Virginia. The below table shows the income groups of tax returns in West Virginia that contained either business or professional income, or partnership/S-corp net income. And only 7.3% of the returns with “business income” had an adjusted gross income over $200,000.
 

AGI

Number of
Returns

% of Total

Under $1

4,076

3.3%

$1 – under $25,000

36,706

30.1%

$25,000 – under $50,000

23,943

19.7%

$50,000 – under $75,000

18,605

15.3%

$75,000 – under $100,000

12,715

10.4%

$100,000 – under $200,000

16,829

13.8%

$200,000 – under $500,000

6,625

5.4%

$500,000 +

2,280

1.9%

 

 

 

$200,000
+

8,905

7.3%

Source: IRS, Statistics of Income
Division. Note: includes returns with business or profession net income and
partnership/S-corp net income

 

However, this estimate is likely very generous. Defining a small business as anyone who receives business income is a very broad definition, and would include professors who get paid for giving a speech or consulting, lawyers and accountants whose firms are organized as partnerships, and corporate executives who get paid to sit on other firms’ boards of directors. In fact, this definition would count both President Obama and Mitt Romney as “small businesses.” Therefore, the number of small businesses affected in West Virginia is likely far below 7.3%.
 
But how much of a tax increase would the expiration of the top rate be on this small number of businesses. Remember, the tax cut expiration is only for income above $200,000 for an individual, if a person earns $250,000, only the last $50,000 would be taxed at a higher rate. 
 
From the above chart, we can see the vast majority of the over $200,000 club is also under $500,000. According to the IRS, overall, the average AGI for incomes between $200,000 and $500,000 in West Virginia is $282,154.
 
Using 2012’s individual income tax brackets, an individual with an income of $282,154 would owe $77,639, an effective rate of 27.5%. Capping the 33% bracket at $200,000 and bumping the top rate to 39.6% would result in a tax bill $83,061, an effective rate of 29.4%, for a difference of $5,422 and 1.9 percentage points. So even for the small number affected, the increase isn’t very large.

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