BY NATASHA ALTAMIRANOAdvocates of allowing the top two federal income tax rates to expire claim that only 2 or 3 percent of businesses would be affected, but a new Tax Foundation report shows that more than one-third of the revenue from an increase in the top two rates would come from business income.

About 39 percent of the $630 billion tax increase on high-income taxpayers (defined by President Obama as individuals earning more than $200,000 and married couples earning more than $250,000) in 2011 would come from business income. This amounts to an extra $246 billion in taxes on business income over 10 years.

“The fact that ‘only’ 2 or 3 percent of taxpayers with business income would face higher taxes is meaningless to the debate,” said Tax Foundation President Scott Hodge, who authored the paper. “What matters most is not the number of taxpayers impacted, but the amount of business income – and, therefore, business activity – impacted.”

Tax Foundation Special Report, No. 185, “Over One-Third of New Tax Increases to Come from Business Income,” is available online at http://www.taxfoundation.org/publications/show/26696.html.

More than 74 percent of tax filers in the highest tax bracket report some business income, compared to 20 percent of those at the lowest bracket.

Of the roughly $864 billion in taxable business income reported on individual income tax returns in 2008, nearly 68 percent was claimed by taxpayers earning more than $200,000, and 35 percent was claimed by taxpayers earning over $ 1 million.

“This means that the combined business income of every taxpayer earning up to $200,000 was still less than the total business income of taxpayers earning more than $1 million,” Hodge said.

More business income is taxed under the individual income tax code as “pass-through” businesses (non-corporate firms such as sole proprietors, S-corporations, Limited Liability Corporations and partnerships) than is taxed under the traditional corporate income tax code. The number of pass-through businesses nearly tripled between 1980 and 2007, from roughly 10.9 million to more than 30 million. The number of traditional C-corporations declined steadily from 2.2 million in 1980 to 1.9 million in 2007.

In the same time period, net receipts for C-corps roughly doubled, from $752 billion to $1.4 trillion, and net receipts from pass-through entities saw a six-fold increase, from $315 billion to more than $1.8 trillion.

The Tax Foundation is a nonpartisan, nonprofit organization that has monitored fiscal policy at the federal, state and local levels since 1937.

Natasha Altamirano is the Tax Foundation’s Manager of Media Relations

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