Obama's tax plans and small business

Originally posted at the Capitol Domes, a new blog from the Central Pennsylvania Business Journal.

Barack Obama says he's for raising taxes on the Fat Cats and Big Businesses, not on middle-class workers and small mom-and-pop operations. But how will his plans play out in reality once we finally move past the political rhetoric?

Not well. At least that's the analysis of the nonpartisan Tax Foundation. Yesterday, the 71-year-old organization released a report from Dr. Robert Carroll showing small businesses -- approximately 45 to 55 percent of them -- would take a major financial hit under Obama plans.

This is not good says Carroll because "Small businesses are an important source of innovation and risk-taking, creating between 60 and 80 percent of net new jobs, employing over half the labor force, and generating more than one half of the nation's gross domestic product."

But if Obama is proposing to increase the top two bracket rates from 33 and 35 percent to 36 and 39.6 percent, respectively, how will that negatively impact small businesses and employees?

Carroll explains it this way:

An often underappreciated feature of the U.S.-tax system is that most small businesses are not required to pay the corporate income tax. Instead, small-business income "flows through" to the owners who report it on their individual income tax returns and pay taxes due. Indeed, about 35 percent of business taxes are paid in this manner by the owners of "flow-through" businesses -- sole proprietorships, partnerships and S-corporations.

The top individual tax rates are particularly important because a disproportionate share of the flow-through income reported by small-business owners is taxed at those rates. Among the small share of tax returns that are subject to the top two tax rates, most receive small-business income.

But what is also lost in this tax increase discussion is the recognition that businesses ultimately don't pay taxes, only people do -- people earning incomes from both big and small businesses.

Don't worry too much about the rich and large corporations though. They'll figure out how to avoid the brunt force of the Obama tax increases (including moving their operations overseas to any number of countries that have cut their corporate taxes). But standing right behind them -- absorbing the blow -- will be the entrepreneurial sector comprising our community mom-and-pop businesses and ultimately our jobs.