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The Entrepreneurial Mind

Higher tax rates for small businesses may lead to fewer jobs

A new study estimated the effects of the policy advocated by President Obama that would allow for higher tax rates for small-business owners starting next year. The study found that such a tax increase would lead to fewer jobs.

By Guest blogger / July 18, 2012

Senate Majority Leader Harry Reid of Nev. listens during a news conference on Capitol Hill in Washington, on Thursday, July 12, 2012, to discuss the Senate's upcoming vote on the Small Business Jobs and Tax Relief Act.

Jacquelyn Martin/AP

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New research released today by the NFIB suggests that allowing tax relief on the top individual rates to expire will hurt job creation and the economy.

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Jeff is the Jack C. Massey Chair in Entrepreneurship and Director of the Center for Entrepreneurship at Belmont University in Nashville, Tenn.

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The report, published by Ernst & Young and authored by Dr. Robert Carroll and Gerald Prante, estimated the effects of the policy advocated by President Obama and some Members of Congress to allow the top tax rates paid by small-business owners to rise sharply starting January 1, 2013. It finds that over time the economy would be 1.3 percent smaller and there would be 710,000 fewer jobs. More than 72 percent of S corporation income is earned by the half-million S corporation owners who pay the top two rates.

Increasing individual rates directly impacts small businesses organized as S corporations, partnerships, LLCs and sole proprietors, also known as “pass-through” businesses. NFIB research shows around 75 percent of all small businesses are organized in such a manner.

Together with the new 3.8 percent tax on investment income introduced in the health care reform law, the study finds that the top tax rate on pass-through business income would skyrocket from 35 to nearly 45 percent.

Other studies suggest that such a 10% marginal tax rate increase will decrease start-up activity by 15-20%.

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