President Barack Obama today signaled his support for an increase in the top two marginal income tax rates come January 2011: 

OBAMA:  “There was broad agreement that we need to work together…there are still differences about how to get there…and here we disagree…I believe, and the other Democrats in the room believe, that [not raising the top marginal income tax rates] would add an additional $700 billion to our debt in the next 10 years, and I continue to believe that it would be unwise and unfair."

Should congressional Democrats go along with the president, they will be raising taxes on a majority of small business profits:

• Under this scenario, the 33 percent rate will rise to 36 percent, and the 35 percent rate will rise to 39.6 percent automatically in January.  These rates affect families and small business owners earning at least $200,000 per year
  
• Unlike corporations, small businesses usually don’t pay their own taxes.  Rather, business profits flow through to the business owner.  The business owner pays taxes on her small business by adding the profits to her income tax form.  Therefore, personal income taxes are the same thing as small business taxes.
  
• According to the IRS, most small business profits pay taxes in households making more than $200,000 per year.  The IRS keeps track of two types of small business income: sole proprietors, and “pass-through” entities like partnerships and S-corporations.
• All small businesses.  There were 30 million tax returns reporting small business income in 2008.  On net (profits reduced by losses), these owners reported business profits of $631 billion.  A large chunk of this net profit--$457 billion—faced taxation in households making more than $200,000 per year.  A majority of small business profits will face a tax rate hike under the Obama-Pelosi-Reid plan.
• Sole proprietors.  There were 22 million tax returns reporting sole proprietor income in 2008.  On net (profits reduced by losses), these owners reported business profits of $264 billion.  A large chunk of this net profit--$90 billion—faced taxation in households making more than $200,000 per year.  34 percent of sole proprietor profits will face a tax rate hike under the Obama-Pelosi-Reid tax hike plan.
  
• S-corporations and partnerships.  There were 8 million partners and S-corporation shareholders in 2008.  On net (profits reduced by losses), these owners reported business profits of $367 billion.  Virtually all of this profit faced taxation in households making more than $200,000 per year. Aggregate pass-through entity profits will almost entirely fall in households making more than $200,000 per year.  These are real small businesses.  For example, there are 250,000 doctor and dentist offices organized as S-corporations or partnerships.  They employ millions of workers making less than $250,000 per year.  These jobs are endangered by Obama’s tax rate hike on small firms.
• 
  Mature small businesses make a majority of the profits and employ a majority of the workers.  The Census Bureau reports that the top three percent of small businesses employ a majority of everyone who works for a small business.  Raising taxes on these most successful of small businesses will cost jobs.

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Posted by Ryan Ellis on Tuesday, November 30, 2010 1:18 PM EST

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