TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Tuesday, October 16, 2012

Obama's $49 Billion Tax Increase on Small Business in 2013

AEIAmerican Enterprise Institute:  Obama’s Big Tax Increases on Small Business:

It is quite a stretch for President Obama to argue that he wants to cut taxes for small businesses. In reality, he is proposing to increase taxes on small businesses by around $49 billion. ...

While in the strictest sense it is true that the president has lowered taxes for small businesses 18 times, this does not accurately reflect the totality of his small-business tax policy. In fact, on net, the president’s policy proposals will inflict significant harm on small businesses.

First, to the 18 times. ... [H]is “tax cuts” for small businesses have not been across-the-board marginal rate cuts, but instead have been targeted and often temporary deductions, tax credits, and subsidies. ... Of the 18, only 10 of them are still in place. Half of these 10 are extensions of programs first enacted by President George W. Bush or even before his time in office. ... So we started with 18, but now we’re down to 5. Estimates from the Congressional Budget Office, the Joint Committee on Taxation, and the U.S. Treasury Department suggest that the sum total of the tax breaks created by the remaining five will amount to at most $3 billion in 2013. ...

[T]he president has proposed the expiration of the Bush tax cuts, which will increase taxes by 4.6 percentage points on incomes above $250,000. Obama will increase taxes by a further 3.8 percentage points on these same incomes through the Unearned Income Medicare Contribution. ... And we shouldn’t forget the reimplementation of the Pease provision, also scheduled for January 1, which adds an additional 1 percentage point to the effective tax rate for these businesses.

It should come as no surprise that these tax increases dwarf the $3 billion in tax decreases that the president has brought small businesses.

According to a report by the Joint Committee on Taxation, approximately $690 billion of business income will be reported on tax returns subject to the marginal rate increases. A very conservative estimate based on IRS figures of the distribution of partnership and S-Corp income shows that only about 80 percent of this income is actually subject to the highest marginal rate, which puts the size of the tax hike at around 9.4% of 80% of $690 billion, or about $52 billion.

That $52 billion is much more than the sum of all tax breaks, which was about $3 billion. So it’s quite a stretch for the president to argue that he wants to cut taxes for small businesses. In fact, he wants to raise taxes on small businesses by an order of magnitude.

(Hat Tip: Glenn Reynolds.)

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American Enterprise Institute is a lying conservative propaganda machine. Dick Cheney is on their board. Nuff said.

Posted by: John | Oct 16, 2012 7:06:07 AM

"Small businesses" as defined by the AEI do not pay income taxes; their owners do. It is fundamentally dishonest to claim that an increase in personal income tax rates is an increase in the taxes on small businesses.

Posted by: Anonymous | Oct 16, 2012 10:21:24 AM

He was also on the board of the Smithsonian Institute. I guess we can write off anything the say ex ante as well.

I don't understand why you are citing this "Nuff" character, or why his word on the subject is definitive.

Posted by: Ted Thalix | Oct 16, 2012 2:04:23 PM

The AEI analysis is incorrect insofar as the 3.8% added tax imposed by the Affordable Care Act does not apply to all income over $250,000, but only to unearned income. So the salaries of baseball players and investment bankers will not be affected.

Also, the Bush tax cuts expire because that is what the law provides, as enacted by the Congress in 2001 and signed by President Bush. Obama has not "proposed" the expiration of these cuts; he has proposed to re-enact most of them, except for the upper 2% of the income distribution.

Posted by: Mitchell S. Fishman | Oct 17, 2012 12:05:17 PM