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Will Obama's Tax Hike Affect You?

Experts say it won't apply to the majority of entrepreneurs.

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Despite concern over the impact of proposed tax increases on entrepreneurs, experts say the changes are unlikely to affect most small business owners. But others say the heavier burden discourages reinvestment and ambition among entrepreneurs.

The Obama administration has proposed higher tax rates for individuals making over $250,000 per year. Those currently paying 33 percent would see their taxes rise to 36 percent, and those at 35 percent to 39.6 percent. But many are concerned about the possible ramifications for entrepreneurs whose profits, because of their businesses' structures, flow through to their personal tax returns.

Giovanni Cortolo, VP of small business policy at the US Chamber of Commerce, worries that the higher tax burden will hit the most successful companies the hardest.

"It's penalizing success," he said. "A shift of this magnitude is not something that provides us with the meritocracy and successful environment we need for small business."

The changes may also threaten owners' ability to reinvest in the business, by diminishing the amount of money they're left with after taxes.

"If I'm a small business owner and my personal income tax increases, it limits my ability to grow my business," Cortolo said.

But Discover's March small business watch, which surveyed 1,000 firms with 5 or fewer employees, found 85 percent of respondents did not expect to earn enough to qualify for higher taxes.

"We asked about the tax increase because there was this perception it would kill the entrepreneurial spirit, that these people were earning more and that's the American dream," said Ryan Scully, director of Discover's business credit card. "But the majority doesn't earn over $250,000 and won't be impacted."

According to Benjamin Harris, a senior research fellow at the Tax Policy Center, a joint venture of the Urban and Brookings Institutes, only a small portion of the sector will see rate hikes, because few companies both make a quarter of a million dollars and pass their profits on to the employer's tax return.

"We estimate that, all in all, only about 2.2 percent of small business units will see a tax increase, and that's just because so few people fall into this category," he said.

According to Harris, "Someone who wants to put money back [into the business] and lives on a low proportion of their taxable income—that's the type of person with a legitimate complaint.

The tax changes wouldn't take effect until 2010, at the earliest.

Last updated: Apr 28, 2009




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